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MSFT Earnings Impact: Buy or Hold Decision?

Software behemoth Microsoft Corp (MSFT) exhibited exceptional prowess in harnessing the AI frenzy, as evidenced by its remarkable performance in the fiscal 2024 first quarter. However, as anticipation builds for the company's upcoming second-quarter earnings report, should investors buy or hold the stock? Keep reading to find out…

Microsoft Corporation (MSFT) is all set to lift the curtains on its fiscal 2024 second-quarter results on January 30, 2024. Wall Street predicts MSFT’s revenue to hit $61.13 billion for the quarter, marking a substantial 15.9% year-over-year increase. Meanwhile, the consensus EPS estimate for the same quarter stands at $2.77, reflecting a notable 19.3% year-over-year rise.

The company delivered solid fiscal first-quarter results, surpassing both revenue and EPS estimates. This solid performance is attributed to MSFT’s swift incorporation of Artificial Intelligence (AI) across all levels of its technology infrastructure, diverse roles, and business operations, all aimed at elevating productivity for its customers.

In addition to AI’s pivotal role, Amy Hood, the Executive Vice President and Chief Financial Officer of MSFT, highlighted that the strong performance for the fiscal year's outset was further propelled by consistent execution from sales teams and partners. The effective execution resulted in MSFT’s cloud revenue soaring 24% year-over-year to $31.80 billion.

Given the strong first quarter performance, on November 28, 2023, MSFT's board of directors declared a quarterly dividend of $0.75 per share, payable to its shareholders on March 14, 2024.

The company’s annual dividend of $3 translates to a 0.74% yield on the prevailing price, while its four-year average dividend yield is 0.90%. Its dividend payouts have grown at a CAGR of 10.1% over the past three years. Moreover, the company has a record of 19 years of consecutive dividend growth.

On top of it, MSFT achieved a remarkable milestone when its market capitalization briefly surpassed $3 trillion last week, firmly establishing itself as the world's most valuable publicly traded company, dethroning Apple Inc. (AAPL) from the top spot. Currently, MSFT boasts a market capitalization of $3.01 trillion, marginally higher than AAPL's $2.98 trillion.

Buoyed by this significant millstone and AI optimism, Citi analysts anticipate MSFT to exceed expectations in its forthcoming fiscal second-quarter earnings report. Likewise, analysts at Morgan Stanley expressed their belief that MSFT’s positioning and contributions in the realm of generative AI are “getting even stronger” and revised their price target from $415 to $450, indicating their continued confidence in MSFT’s potential to exceed consensus estimates.

MSFT’s shares have rallied 23.2% over the past three months and 7.8% over the past month to close the last trading session at $403.93.

Here are the fundamental aspects of MSFT that could influence its performance in the near term:

Strong Financials

MSFT’s total revenue for the fiscal 2024 first quarter (ended September 30, 2023) increased 12.8% year-over-year to $56.52 billion, while its gross margin and operating income rose 15.9% and 25% from the prior-year quarter to $40.22 billion and $26.90 billion, respectively.

Moreover, the company’s net income grew 27% year-over-year to $22.29 billion. In addition, its EPS came in at $2.99, up 27% from the year-ago value.

Upbeat Analyst Estimates

The consensus revenue estimate of $243.16 billion for the fiscal year ending June 2024 represents a 14.7% improvement year-over-year. Meanwhile, the consensus EPS estimate of $11.21 for the same period reflects a 14.3% year-over-year surge.

Robust Profitability

MSFT’s trailing-12-month Return On Common Equity (ROCE) and net income margin of 39.11% and 35.31% are significantly higher than the 1.50% and 2.07% industry averages, respectively. Its trailing-12-month cash per share of $10.83 is 463.4% higher than the $1.92 industry average. Furthermore, the stock’s trailing-12-month EBIT margin of 43.45% is 828% higher than the 4.68% industry average.

POWR Ratings Exhibit Solid Prospects

MSFT’s robust fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Buy 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 an A grade for Sentiment, justified by its positive analyst estimates for the second quarter and fiscal year ending June 2024. Moreover, the stock’s B grade for Quality is consistent with its higher-than-industry profitability metrics.

Within the B-rated Software - Business industry, MSFT is ranked #10 out of the 43 stocks.

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

Bottom Line

In light of the ongoing AI fervor, MSFT has distinguished itself as a frontrunner in the field. The company's strategic moves, such as investments in OpenAI and the successful integration of AI technologies across its vast ecosystem, have solidified its position in the AI revolution.

Additionally, the company’s dividend growth, market capitalization milestone, strong first-quarter performance, and optimistic analyst estimates for the second quarter further bolster MSFT’s appeal as an investment candidate. Therefore, as MSFT gears up to disclose its second-quarter results tomorrow, it might be an opportune time to scoop up the company’s shares.

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: Sapiens International Corporation N.V. (SPNS), Yext, Inc. (YEXT), and SolarWinds Corporation (SWI), with an A (Strong Buy) ratings. To explore more Software – Business stocks, click here.  

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

MSFT shares rose $2.59 (+0.64%) in premarket trading Monday. Year-to-date, MSFT has gained 8.07%, versus a 2.54% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Mukherjee

Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.


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