Tech titan Microsoft Corporation (MSFT) is scheduled to report earnings on Thursday, April 25, 2024. Despite optimistic earning projections, this article discusses why it might be wise to hold entry in this stock.

MSFT is poised to demonstrate robust performance driven by the ongoing growth of its cloud platform, including Azure, Office 365, and other cloud services. Additionally, recent partnerships with OpenAI for AI advancement and a significant data center initiative further underscore its momentum. Street expects MSFT’s revenue and EPS to rise 15.2% and 16.2% year-over-year to $60.89 billion and $2.84 in the to-be reported fiscal third quarter ended March 2024.

If we look at the previous quarter’s performance, MSFT’s Productivity & Business Processes segment saw a 7% year-over-year revenue increase to $17 billion, driven by growth in Office 365 Commercial and Dynamics CRM. Revenue in the Intelligent Cloud segment rose by 17.8% from the prior-year quarter to $21.50 billion, fueled by robust growth in Azure and other cloud services.

However, the More Personal Computing segment experienced a revenue decline of 18.8% year-over-year to $14.2 billion, attributed to decreases in Windows and gaming.

MSFT’s shares have soared 42.6% over the past year but declined 4.9% over the past month to close the last trading session at $407.57. Its 24-month beta is 1.11.

Here are the key factors shaping MSFT’s near-term performance:

Strides in AI

MSFT has been making strides in the field of AI. On April 23, 2024, the company introduced Phi-3-mini, a lightweight AI model aimed at broadening its client base with cost-effective options. Phi-3-mini is immediately available on Microsoft’s Azure cloud platform, Hugging Face’s machine learning model platform, and Ollama for local machine deployment.

MSFT’s recent investments in AI, including a $1.50 billion investment in UAE’s G42 and partnerships with companies like Mistral AI, highlight its commitment to advancing AI technology.

Additionally, in January, MSFT unveiled new generative AI and data solutions tailored for retailers, covering everything from personalized shopping experiences to store operations.

Mixed Financials

During the fiscal 2024 second quarter, which ended December 31, 2023, MSFT’s total revenue increased 17.6% year-over-year to $62.02 billion. Its operating income rose 32.5% from the year-ago value to $27.03 billion.

However, the company’s cash outflow from investing activities grew 905.9% from the prior year’s period to $71.93 billion. As of December 31, 2023, MSFT’s cash and cash equivalents amounted to $17.31 billion, down from $34.70 billion as of June 30, 2023.

Stretched Valuation

MSFT’s forward non-GAAP P/E of 34.27x is 48.9% higher than the industry average of 23.02x. Its forward EV/S multiple of 12.32 is 348.2% higher than the 2.75 industry average. Moreover, the stock’s P/S of 12.19x is 342.2% higher than the 2.76x industry average.

Further, its forward P/B multiple of 11.14 is 189.6% higher than the 3.85 industry average.

Robust Profitability

MSFT’s trailing-12-month EBIT margin of 44.59% is 810.7% higher than the 4.90% industry average. Its trailing-12-month net income and EBITDA margins of 36.27% and 52.04% are notably higher than the industry averages of 2.65% and 9.50%.

The stock’s trailing-12-month ROCE and ROTA of 39.17% and 17.54% are significantly higher than the industry averages of 3.49% and 1.51%.

POWR Ratings Exhibit Uncertain Prospects

MSFT’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, translating to a Neutral in our proprietary rating system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MSFT has a C for Growth, echoing its previous quarter’s mixed financial results. Its Momentum grade sits at a C, reflecting its fluctuating price performance.

Within the Software – Business industry, MSFT is ranked #17 out of the 43 stocks.

Beyond what we’ve stated above, we have also rated the stock for Value, Sentiment, Quality, and Stability. Get all MSFT ratings here.

Bottom Line

Demand for MSFT’s cloud solutions is booming thanks to the rising shift of workloads to the cloud, particularly in infrastructure monitoring, application performance management, and human capital management. However, its personal and gaming revenues continue to fall.

Additionally, amid the AI boom, MSFT emerges as a leader, leveraging strategic investments in OpenAI and seamless integration of AI across its ecosystem to solidify its position in the AI revolution.

Nonetheless, with valuation multiples significantly higher than industry averages and a high beta indicating volatility, the stock appears to carry elevated risk at this point. Therefore, investors may want to exercise caution and wait for a more favorable entry point before considering adding MSFT to their portfolio.

How Does Microsoft Corporation (MSFT) Stack Up Against Its Peers? 

With its uncertain short-term outlook, MSFT’s chances of outperforming in the coming weeks and months are diminished. However, you might want to explore other stocks in the Software – Business industry with an A (Strong Buy) rating:

F5 Inc. (FFIV)

Yext, Inc. (YEXT)

SolarWinds Corporation (SWI)

To explore more Software – Business stocks, click here.

What To Do Next?

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MSFT shares rose $2.50 (+0.61%) in premarket trading Wednesday. Year-to-date, MSFT has gained 9.34%, versus a 6.99% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...

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