Last week, Microsoft (NASDAQ: MSFT) posted better-than-expected fiscal results for the fourth quarter, despite coronavirus-induced challenges. In addition, the technology giant is poised to continue growing in the long term thanks to its huge investments and its successful transition to cloud computing. But with just 6% below its all-time highs, and 43% more in the past 12 months, is it a Microsoft stock purchase?
Solid results and long-term growth.
The coronavirus had a negative impact on some of the Microsoft companies during the last quarter. For example, given the weak job market, the social network LinkedIn (acquired in 2016 for $ 26.2 billion) increased its revenue by just 11% year-over-year in constant currency, down from 28% a year ago. Additionally, search advertising revenue fell 17% year-over-year due to lower advertising rates.
Image source: Getty Images.
However, other companies benefited from the shelter orders in place. For example, with annual revenue growth of 68% in constant currency, the Xbox console and services accounted for Microsoft’s fastest growing activity in the last quarter.
Beyond these quarterly short-term results, Microsoft’s fiscal year 2020 was impressive. The company increased its revenues to $ 143 billion, an increase of 13.6% year-over-year, with strong growth in all three segments.
| Microsoft segment | Products and services | 2020 tax revenue | Tax revenue growth 2020 (year-on-year) |
|---|---|---|---|
| Productivity and Business Processes |
Office 365, Microsoft Teams, Skype, LinkedIn, Dynamics business solutions and others. |
$ 46.4 billion | 12.7% |
| Smart cloud | SQL Server, Windows Server, GitHub, Azure, business services and others. | $ 48.4 billion | 24.1% |
| More personal computing | Windows, devices (surface tablets and others), games and search. | $ 48.2 billion | 5.6% |
Data source: Microsoft. YOY = year after year.
Unsurprisingly, cloud companies drove the company’s bottom line. CEO Satya Nadella highlighted cloud business revenue in the company’s most recent earnings call, noting that Microsoft Office 365 Business, Microsoft Azure and other cloud companies topped $ 50 billion in the fiscal year. 2020, compared to $ 38.1 billion the previous year.
Based on the midpoint of the administration’s revenue guide, year-over-year revenue growth should slow to 7.7% over the next quarter. But given Microsoft’s scale, revenue growth is still impressive, corresponding to more than $ 2.5 billion in additional revenue in just three months. And beyond these short-term forecasts, the company is poised to continue growing in the long term.
A study by Grand View Research anticipates that cloud market revenue will grow at a compound annual rate of 14.6% by 2027, and Microsoft should at least match that growth. According to Canalys, Microsoft Azure increased its market share to 17% in the cloud infrastructure market in the first quarter, from 15% a year ago. And during the last quarter, Azure revenue increased 50% in constant currency.
Additionally, with $ 19.3 billion in research and development spending in the last fiscal year, Microsoft deployed significant and growing resources to remain competitive that only a few technology stocks can match. Of course, these investments extend across the company’s various businesses, but Microsoft realizes significant synergies with its software solutions that leverage its Azure cloud infrastructure platform.
MSFT Research & Development Expense Data (Annual) by YCharts
What about the stock?
With its increasing scale, Microsoft increased its 2020 fiscal operating income to $ 53 billion, compared to $ 43 billion a year ago. And with $ 73.2 billion in cash and short-term investments in excess of its total debt, the tech giant seems immune to long-term financial difficulties. That safety net also provides the company with some dry powder to acquire businesses that it can expand to grow its empire. For example, it acquired Affirmed Networks this year to expand its presence in the growing 5G market.
As a result, the market values the company with a high price-benefit ratio (P / E) of 12 months at the end of 36. And taking into account the earnings forecast by analysts for fiscal year 2021, that multiple falls to 32, which remains elevated
In addition, the proportion of multiple sales of Microsoft shares has expanded in recent years despite flat revenue growth. That multiple expansion is related to the company’s growing operating margins as it scales. But maintaining long-term double-digit revenue growth on such a scale will be challenging, which should limit the potential to improve operating margins that have already reached high levels.
MSFT EV Data at Revenue by YCharts
Therefore, despite Microsoft’s phenomenal operating performance in recent years, cautious investors should stay on the sidelines. Given its valuable valuation and the likely slowdown in revenue growth due to its massive scale, the upside potential of Microsoft shares appears limited, even if the company continues to deliver strong results.
