In April, British antitrust regulators quashed Microsoft Corporation’s (MSFT) historic $69 billion acquisition of Activision Blizzard, the video game giant, citing concerns that the deal could hinder competition in the rapidly expanding cloud gaming sector, particularly for coveted titles such as Call of Duty.

The Competition and Markets Authority’s final report mandated the prohibition of the Merger due to concerns over substantial competition loss, particularly in cloud gaming. The deal’s potential impact on the accessibility of gaming via various devices and the reduction of costly console requirements drove this decision.

However, Britain’s competition watchdog reversed its earlier stance to block the $69 billion acquisition of Activision Blizzard, securing final approval for the colossal gaming deal. This decision clears the path for one of history’s most substantial tech transactions.

The approval of MSFT’s acquisition of Activision Blizzard enables the tech giant to expand its influence in the gaming industry, especially in the growing cloud gaming market. This strategic move is also expected to secure the company’s position, enhancing its global gaming portfolio and customer offerings.

Shares of MSFT have gained 46.7% over the past year to close the last trading session at $331.16.

Here is what could shape MSFT’s performance in the near term:

Recent Developments

On September 27, MSFT embarked on a transformative journey with Mercy, utilizing generative AI and digital innovations to enhance healthcare delivery. The partnership empowers medical professionals, enriching patient care, and symbolizes MSFT’s pioneering role in advancing healthcare through cutting-edge technologies.

On September 14, MSFT and Oracle Corporation (ORCL) announced a groundbreaking collaboration, Oracle Database@Azure, which grants customers effortless access to Oracle’s database services operating on Oracle Cloud Infrastructure, now conveniently situated within Microsoft Azure datacenters.

This integration leverages ORCL’s database services within Azure, attracting a broader customer base and enriching MSFT’s cloud portfolio. By facilitating cloud migration and modernization, this collaboration would enhance the company’s standing in the competitive cloud market.

Solid Financials

MSFT’s total revenue increased 8.3% year-over-year to $56.19 billion in the fiscal fourth quarter that ended June 30, 2023. Its operating income rose 18.1% from the year-ago value to $24.25 billion. In addition, the company’s net income and EPS grew 19.9% and 20.6% from the prior year’s period to $20.08 billion and $2.69, respectively.

Favorable Analyst Estimates

The consensus revenue estimate of $235.86 billion for the fiscal year ending June 2024 reflects an 11.3% year-over-year improvement. Likewise, the consensus EPS estimate of $11.01 for the ongoing year exhibits a 12.2% rise from the previous year. Also, the company surpassed the consensus EPS estimates in all four trailing quarters.

In addition, analysts expect the company’s revenue and EPS for the next fiscal year ending June 2025 to grow 13.4% and 15% from the previous year to $267.34 billion and $12.65, respectively.

Historical Growth Record

Over the past three years, MSFT’s revenue and EBITDA increased at a CAGR of 14% and 16.1%, respectively. Its net income and EPS grew at respective CAGRs of 17.8% and 18.9%. In addition, the company’s total assets and levered free cash flow rose at a CAGR of 11% and 11.3%, respectively.

High Profitability

MSFT’s trailing-12-month gross profit margin of 68.89% is 40.4% higher than the industry average of 49.10%. Also, the stock’s trailing-12-month EBITDA margin and levered FCF margin of 48.14% and 22.31% are 426.1% and 202.2% higher than the industry averages of 9.15% and 7.38%, respectively.

Stretched Valuation

In terms of forward P/E, MSFT is trading at 30.09x, 38.6% higher than the industry average of 21.71x. Its forward EV/Sales of 10.30x is 305.7% higher than the 2.54x industry average. Moreover, MSFT’s forward EV/EBITDA of 20.74x is 51.7% higher than the 13.67x industry average.

POWR Ratings Reflect Solid Prospects

MSFT’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating 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 an A grade for Sentiment, in sync with favorable analyst estimates. Also, the stock has a B for Stability, consistent with its 60-month beta of 0.90.

MSFT is ranked #10 in the 44-stock Software – Business industry. Click here to access MSFT’s Growth, Value, Quality, and Momentum ratings.

Bottom Line

The approval of MSFT’s acquisition of Activision Blizzard bolsters its position in the gaming industry, particularly in cloud gaming, aligning with its broader strategy to innovate and expand its influence, while partnerships in healthcare and cloud services further enhance its portfolio and competitive edge.

Coupled with its strong profitability, solid financials, and solid track record of growth, MSFT should present an attractive buy opportunity this week.

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

While MSFT has an overall grade of B, equating to a Buy rating, you may also check out these other stocks within the Software – Business industry: VMware, Inc. (VMW), F5, Inc. (FFIV), and Sapiens International Corporation N.V. (SPNS) with an A (Strong Buy) ratings. For exploring more A-rated Software – Business stocks, click here.

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MSFT shares were trading at $327.65 per share on Friday afternoon, down $3.51 (-1.06%). Year-to-date, MSFT has gained 37.56%, versus a 14.09% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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