Microsoft Corporation

Microsoft Corporation (NASDAQ: MSFT) is a computer software corporation. Software products, services, devices, and solutions are developed and supported by the company. Productivity and Business Processes, Intelligent Cloud, and More Personal Computing are the company's segments.

Latest News

• In new cooperation with Microsoft Corp., Mastercard announced the introduction of an upgraded identification solution meant to improve the online shopping experience and combat digital fraud on April 25, 2022. First-party fraud, in which a lawful online transaction is later contested, is one of the fastest-growing kinds of digital fraud. The global cost of first-party fraud is estimated to exceed USD 50 billion.
• The Kraft Heinz Company and Microsoft Corp. established a partnership on April 21, 2022, to create technologies that would help the consumer products major expedite its transition and allow a more resilient supply chain. Kraft Heinz will transition the bulk of its worldwide data center assets to Azure, as well as its enterprise resource planning (ERP) software to SAP on Azure, using Microsoft Azure as its preferred cloud platform.
• Microsoft Corp. released its financial results for the quarter ended March 31, 2022, on April 26, 2022, which included better-than-expected commercial bookings growth and Microsoft Cloud revenue due to continuing customer commitment to its cloud platform and solid sales execution.

Key Takeaways from Q3 FY22 financial results

• For the quarter ending March 31, 2022, revenue was USD 49.4 billion, up 18 percent over the previous fiscal year's similar period.
• Because of higher sales from Office commercial and consumer products and cloud services, 34 percent increased Linkedin revenues, and 22 percent increased revenues from Dynamic products and cloud services, revenue in Productivity and Business Processes climbed 17 percent to USD 15.8 billion.
• Intelligent Cloud sales climbed by 26% to USD 19.1 billion, owing to a 46 percent rise in Azure and other cloud services revenue.
• More Personal Computing's sales climbed by 11% to USD 14.5 billion, owing to a gain of 11% in revenue from Windows OEM, 14% in revenue from Windows commercial products, 4% in revenue from Xbox services, and 23% in income from news advertisements.
• Operating income for the quarter ending March 31, 2022, was USD 20.4 billion, up 19 percent over the previous fiscal year's similar period.
• For the quarter ending March 31, 2022, net income was USD 16.7 billion, up 8% GAAP (up 13% non-GAAP), and diluted profits per share were USD 2.22, up 9% GAAP (up 14% non-GAAP) over the same time prior fiscal year.

Balance sheet position

• On March 31, 2022, total cash, cash equivalents, and short-term investments were USD 104.69 billion, down from USD 130.33 billion on June 30, 2021. This drop is mostly due to share repurchases, dividends, and capital expenditures in company acquisitions.
• Long term debt decreased from USD 50 billion on June 30, 2021, to levels of USD 48.18 billion as of March 31, 2022.

Other key financial highlights for the Q3 FY22

• In the third quarter of the fiscal year 2022, Microsoft returned USD 12.4 billion to shareholders in the form of share repurchases and dividends, up 25% from the third quarter of the fiscal year 2021.

Key Risks

• FX risk: During the quarter, the US dollar rose, resulting in a 1-point FX headwind to overall company sales, compared to estimates. Therefore, sales were down USD 302 million, and EPS was down USD 0.03 per share. Therefore, FX is one of the primary risk factors affecting Microsoft.
• Macroeconomic risk: Microsoft has halted all new product and service sales in Russia. The revenue earned in Russia accounts for less than 1% of the overall revenue of the firm. This quarter's impact on operating income was around USD 130 million, split equally between reduced sales and greater bad debt charge, resulting in a USD 0.01 negative EPS impact.

Outlook

• Foreign currency impact: 2 point drop in overall revenue growth, 3 point drop in production process, 2 point drop in Intelligent cloud, and 1 point drop in COGs and OPEX growth.
• Sales of productivity and business processes are expected to be in the range of USD 16.65 to USD 16.9 billion, while Intelligent cloud sales are expected to be in the range of USD 21.1 to USD 21.35 billion, and more personal computing sales are expected to be in the range of USD 14.65 to USD 14.95 billion.
• COGs are estimated to be between USD 16.6 and USD 16.8 billion, with operating expenses between USD 14.8 and USD 14.9 billion, while the effective tax rate is estimated to be around 18%.

Valuation Methodology: Price/Earnings Per Share Multiple - based Relative Valuation

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation

Over the past six months, MSFT's share price has corrected by 21.07%. The stock is currently leaning towards the lower end of its 52-week range of USD 243 to USD 349.67. We have valued the stock using the Price/ Earnings Per Share multiple-based relative valuation method and arrived at a target price of USD 323.91. We believe that the company is trading at a premium from its peer's average considering strong fundamentals, competitive advantages in market share and cash position, and a dividend yield that gives bullish estimates for the upcoming near future.

Considering the strong fundamentals, robust top-line results, associated risks, positive outlook, and current valuation, we give a "Buy" recommendation on the stock at the current price of USD 266.60 up 1.55%, as of May 26, 2022, at 11:40 AM PDT.

1-Year Technical Chart (as of May 26, 2022, at 11:40 AM PDT). Data Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary:

*Current Price as of May 26, 2022, at 11:40 AM PDT.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Note 3: The report publishing date is as per the Pacific Time Zone.