Software giant Microsoft Corporation (MSFT - Get Rating) recently announced a landmark partnership expansion with Lockheed Martin Corporation (LMT) to enhance the next generation of technology for the Department of Defense.

Jason Zander, executive vice president of Strategic Missions and Technologies, MSFT, said, “Our national security leaders need an unassailable information advantage, which is why we’re bringing the power of the hyper scale cloud to accelerate their national security missions.”

Moreover, the company launched its Microsoft Supply Chain Platform to help organizations maximize their supply chain data estate investment. This product significantly contributes to supply chain management and expands MSFT’s lucrative portfolio.

MSFT has paid dividends for 19 consecutive years. Its dividend payouts have increased at a 9.8% CAGR over the past five years and at a 10.4% CAGR over the past three years. Its current dividend yield is 1.07%, and its four-year average yield is 1.05%.

MSFT has lost 24.2% year-to-date and 22.6% over the past year to close the last trading session at $255.02. However, it has gained 15.9% over the past month.

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

Solid Financials

For its fiscal 2023 first quarter that ended September 30, 2022, MSFT’s total revenue came in at $50.12 billion, up 10.6% year-over-year. Its adjusted net income came in at $17.56 billion, up 2% year-over-year, while its adjusted EPS came in at $2.35, up 3.5% year-over-year. Also, its operating income came in at $21.52 billion, up 6.3% year-over-year.

Favorable Analyst Expectations

Analysts expect MSFT’s revenue to increase 2.4% year-over-year to $52.97 billion for the quarter ending December 2022 and 6.2% year-over-year to $52.44 billion for the quarter ending March 2023. Moreover, its revenue is expected to increase 7.2% year-over-year to $212.46 billion in 2023 and 13% year-over-year to $240.10 billion in 2024.

In addition, its EPS is expected to increase 5% year-over-year to $2.33 for the quarter ending March 2023. Its EPS is estimated to grow 3.7% year-over-year to $9.55 in 2023 and 17.1% year-over-year to $11.18 in 2024. Also, its EPS is estimated to rise 13% per annum for the next five years. It beat EPS estimates in three of four trailing quarters.

Robust Profitability

MSFT’s trailing-12-month gross profit margin of 68.26% is 36.7% higher than the industry average of 49.94%. Its trailing-12-month EBITDA margin of 48.67% is 311.2% higher than the industry average of 11.84%, and its trailing-12-month net income margin of 34.37% is 976.5% higher than the industry average of 3.19%.

In addition, its trailing-12-month ROCE, ROTC, and ROTA of 42.88%, 21.97%, and 19.40% are compared with the industry averages of 4.99%, 3.24%, and 1.52%, respectively.

POWR Ratings Reflect Promising Outlook

MSFT has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 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, consistent with its higher-than-industry profitability margins. Also, it has a B grade for Sentiment and Stability, consistent with favorable analyst expectations and a beta of 0.93, respectively.

In the 53-stock Software – Business industry, MSFT is ranked #9.

Click here for the additional POWR Ratings for MSFT (Growth, Value, Momentum).

View all the top stocks in the Software – Business industry here.

Bottom Line

MSFT’s solid fundamental positioning justifies its huge market value. It has a market capitalization of $1.89 trillion. Wall Street analysts expect the stock to hit $295.38 soon, indicating a potential upside of 15.8%. Given the stock’s steady dividend payments, higher-than-industry profitability, and solid growth prospects, every investor should own it at least once.

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

While MSFT has an overall POWR Rating of B, one might consider looking at its industry peers, Yext, Inc. (YEXT - Get Rating), which has an overall A (Strong Buy) rating, and VMware, Inc. (VMW - Get Rating), GoDaddy Inc. (GDDY - Get Rating), and F5, Inc. (FFIV - Get Rating), which have an overall B (Buy) rating.

MSFT shares were trading at $251.31 per share on Monday morning, down $3.71 (-1.45%). Year-to-date, MSFT has declined -24.58%, versus a -14.36% rise in the benchmark S&P 500 index during the same period.

About the Author: Riddhima Chakraborty

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries. More...

More Resources for the Stocks in this Article