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Bull of the Day: Microsoft (MSFT)

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Despite the best efforts of a few market-wide headwinds, many of the leading tech behemoths which have been at the forefront of our historic bull run continue to climb higher. Of these, several—including Microsoft (MSFT - Free Report) —have been flagged by the Zacks Rank recently and could be poised for even more gains thanks to key initiatives and positive sentiment.

Microsoft is obviously a pioneer in the PC software market, but the driving force behind its nearly 31% year-to-date surge has been its efforts beyond that traditional business. For instance, Microsoft has witnessed remarkable growth in its Azure division, which provides one of the world’s most popular public cloud computing platforms.

Elsewhere, Microsoft has benefitted from the growth of Office 365, innovation at Xbox, and strategic acquisitions like that of GitHub and LinkedIn. This positivity has translated into positive analyst sentiment, upward earnings estimate revisions, and further growth potential.

Latest Earnings and Outlook

Microsoft most recently reported earnings on July 19. The tech giant notched adjusted earnings of $1.13 per share, beating the Zacks Consensus Estimate by six cents and improving nearly 7% year over year. Revenue for the quarter came in at $30.1 billion, handily beating our consensus estimate and surging 17.5% from the year-ago period.

Microsoft’s commercial business was the key business catalyst, with total commercial revenues advancing 10% year over year. Commercial cloud revenue was up 53%, while Office 365 revenue gained 38%. Azure revenue climbed 85% on from the comparable period last year.

Other key growth areas for Microsoft were Gaming, where revenue grew 39% year over year, and LinkedIn, which saw total revenue growth in excess of 37%.

This impressive quarter led to positive analyst estimate revisions:

The key thing to note here is that the Zacks Consensus Estimates for Microsoft’s full fiscal year and upcoming fiscal year have moved higher on the back of strong agreement among analysts revising estimates for those periods.

For the fiscal year ending June 2019, Microsoft is expected to see EPS growth of nearly 9.5%. In the next fiscal year, early estimates have the tech company seeing earnings growth of 12%. Revenue estimates are calling for top-line growth of 11% and 10% in those years, respectively.

These growth estimates are not blowing the doors off their hinges, but they represent solid improvement for a company of Microsoft’s size. Moreover, positive revisions and growth are just a few of the reasons to like Microsoft right now. Investors should also be interested in the case that its share are undervalued at their current levels.

Valuation

In the below chart, you can see a look at how MSFT’s P/E has stacked up against its industry’s average over the past year:

 

Microsoft is currently trading at about 25.7x forward 12-month earnings. That’s obviously a premium compared to the broader market average, but compared to the company’s software peers, it almost looks like a discount.

Moreover, the stock is trading within a reasonable range considering the valuations it has seen recently. MSFT has traded as high as 26.9x within the past year and has a 52-week median earnings multiple of 24.5x.

It’s also worth noting that MSFT has a PEG ratio of just 2.1, so the company’s earnings growth outlook is also coming at a decent price.

Other Things to Like

On top of everything mentioned above, Microsoft is also a nice growth and income play as it provides a dividend yield of about 1.5%. The stock also looks great from a technical perspective, with shares trading above their 50-day moving average for most of the trailing six months.

Bottom Line

Microsoft has the combination of innovation, positive earnings results, upward estimates, technical strength, and income that basically any investor should like. Tech behemoths have been leading the way for years, and if this bull market continues, they will surely maintain that leadership position. Microsoft seems like a great idea in that scenario.

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