Microsoft Corporation (MSFT - Get Rating) develops and supports a range of software products, services, devices, and solutions. The company operates in the Productivity and Business Processes, Intelligent Cloud, and Personal Computing segments.

In the last reported quarter, MSFT beat the EPS and revenue estimates by 1% and 0.6%, respectively. The company surpassed consensus EPS estimates in each of the trailing four quarters.

The stock has gained 1.9% in price over the past month but declined 23.6% year-to-date and 8.6% over the past year to close the last trading session at $256.72.

MSFT has been a stock that has created wealth and value for investors. The company generates a lot of free cash flow, enabling it to grow its dividend. It has increased its dividend for 18 consecutive years now. MSFT’s four-year average dividend yield is 1.11%, and its forward annual dividend of $2.48 translates to a 0.97% yield. Its dividend has grown at a 10.4% CAGR over the past three years.

MSFT’s revenue has grown at a CAGR of 16.36% over the past three years. The company’s EBITDA grew at a CAGR of 22.36% over the past three years. In addition, its net income grew at a CAGR of 27.54% over the past three years.

MSFT’s Chairman and CEO Satya Nadella said, “Going forward, digital technology will be the key input that powers the world’s economic output.” “Across the tech stack, we are expanding our opportunity and taking share as we help customers differentiate, build resilience, and do more with less.”

MSFT’s Cloud revenue grew 32% year-over-year to $23.40 billion in the last reported quarter. Enterprises’ increasing shift to the cloud and rising spending on cloud infrastructure services are helping MSFT grow.

Earlier this year, MSFT bought Nuance Communications for $19.7 billion in an all-cash deal in its effort to provide cloud computing services to healthcare companies.

MSFT is also focusing on upcoming technologies like metaverse to drive its future growth. The company has an augmented reality (AR) headset, HoloLens 2, and a mixed-reality (MR) meeting platform, Mesh For Teams. To solidify its gaming business and enter the metaverse, the company announced a deal to acquire Activision Blizzard, Inc. (ATVI) for $68.7 billion.

Here’s what could influence MSFT’s performance in the upcoming months:

Robust Financials

MSFT’s revenue increased 18.4% year-over-year to $49.36 billion for the third quarter ended March 31, 2022. Its operating income increased 19.4% from the year-ago value to $20.36 billion, while its net income grew 8.2% year-over-year to $16.73 billion. The company’s EPS came in at $2.22, representing a 9.3% year-over-year increase.

Favorable Analyst Estimates

Analysts expect MSFT’s EPS for fiscal 2022 (ended June 30, 2022) and fiscal 2023 (ending June 30, 2023) to increase 17.4% and 13.7% year-over-year to $9.36 and $10.65, respectively. Its revenue for fiscal 2022 (ended June 30, 2022) and fiscal 2023 (ending June 30, 2023) to increase 18.1% and 14% year-over-year to $198.56 billion and $226.53 billion, respectively.

High Profitability

In terms of trailing-12-month EBIT margin, MSFT’s 42.56% is significantly higher than the 8.06% industry average. Likewise, its 49.33% trailing-12-month EBITDA margin is 272.4% higher than the industry average of 13.24%. Furthermore, the stock’s trailing-12-month ROCE, ROC, and ROA came in at 48.72%, 22.43%, and 21.03%, compared to the industry averages of 7.16%, 4.62%, and 3.01%, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, MSFT’s 27.43x is 60.8% higher than the 17.06x industry average. Likewise, its 1.71x forward non-GAAP PEG is 29% higher than the 1.33x industry average. And the stock’s 10.61x forward P/B is 191% higher than the 3.64x industry average.

POWR Ratings Show Promise

MSFT has an overall rating of B, which equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different 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 B grade for Quality, in sync with its 68.73% trailing-12-month gross profit margin, which is 36% higher than the industry average of 50.53%.

It has a B grade for Sentiment, consistent with favorable analyst estimates. Furthermore, the company has a B grade for Stability, justifying its 0.93 beta.

MSFT is ranked #12 out of 55 stocks in the Software – Business industry. Click here to access MSFT’s Growth, Value, and Momentum ratings.

Bottom Line

Despite being at the forefront of the tech revolution for decades, MSFT is still gunning for growth. The company is focusing on strengthening its cloud offerings, data analytics, CRP, cybersecurity, gaming, and the metaverse. The company has also grown its revenue, EBITDA, and earnings at healthy rates.

Given its robust financials, consistent dividend growth, favorable analyst estimates, and high profitability, it could be wise to add this stock to your portfolio.

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

MSFT has an overall POWR Rating of B, equating to a Buy rating. You might want to consider investing in the following Software – Business stocks with an A (Strong Buy) and B (Buy) rating: Software Aktiengesellschaft (STWRY - Get Rating), Amdocs Limited (DOX - Get Rating), and Citrix Systems, Inc. (CTXS - Get Rating).

MSFT shares rose $0.09 (+0.04%) in after-hours trading Monday. Year-to-date, MSFT has declined -24.07%, versus a -18.98% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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