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After the incredible excitement of ChatGPT’s release, and the integration of new Artificial Intelligence technologies into its 365 platform, Microsoft (MSFT - Free Report) stock rallied for nearly six months unperturbed. Curiously, that strong performance has been followed by nearly four months of sideways action in the stock, even as the AI hype has continued to gain momentum.
However, this consolidation in price has likely set Microsoft up for another bull-run, which I think may commence with the coming earnings announcement. Microsoft reports earnings Tuesday, October 24 after the market closes.
This price consolidation has set Microsoft up in a few ways. It has lowered its earnings multiple, which now sits at its five-year median, tamped down investors’ expectations, and built out a compelling technical chart pattern.
Furthermore, evidence of a reacceleration in the Intelligent Cloud segment, and PC sales, which have been laggards over the past year may extinguish any bearish sentiment in the stock.
Image Source: TradingView
Earnings Estimates
Even with the explosion in generative AI, Microsoft earnings estimates have stayed flat throughout 2024, giving Microsoft a Zacks Rank #3 (Hold) rating. Analysts are forecasting sales to grow 8.6% YoY to $54.4 billion and earnings to climb 12.8% to $2.65 per share. Microsoft has missed earnings estimates only once in the last five years.
Several growth drivers stand out for Microsoft. The Intelligent Cloud segment, which contributes to 42% of its overall revenue, is anticipated to bounce back, showing an estimated growth of 15.5% after a deceleration. This reflects a robust demand for digital transformation solutions, even amidst economic uncertainties.
However, while the PC market's softness could affect its personal computing business, projections from the International Data Corporation suggest a potential recovery in 2024. IDC notes that “Global PC shipments are expected to return to growth in 2024 albeit below 2019 pre-pandemic levels.”
Image Source: Zacks Investment Research
Competitors?
Of course, Microsoft is in intense competition with both Amazon (AMZN - Free Report) and Alphabet (GOOG - Free Report) L for the cloud services market. Amazon remains the leader, while Alphabet is the fastest growing. Microsoft is also growing faster than Amazon, so both it and Alphabet were able to take a few basis points of market share over the last year.
I am very curious to see growth rates in cloud computing for all the technology giants. Because of Microsoft’s leadership in AI, I wonder if businesses begin to prefer its platform, as AI integration should continue to improve systems efficiency. Alternatively, both Alphabet and Amazon begun their own foray into developing AI, so there will also be race to see who can create the best products in the space, and who can integrate it best into their own platforms.
Interestingly, Microsoft and Amazon just announced a major partnership, as Amazon is in talks to become a customer of Microsoft. Apparently, in a deal that could be worth as much as $1 billion, Amazon will be committing to a five-year agreement and a million licenses to use Microsoft’s 365 tools. The deal could be inked as soon as next month.
Valuation
Now that the stock price has taken a multi-month break, Microsoft’s earnings multiple has eased off its highs as well. After trading all the way up to 37x forward earnings, it has come down to 30.3x, which is in line with the industry average, and its five-year median.
Microsoft also pays a dividend of 0.8% and has raised the payment by an average of 10% annually over the last five years.
Image Source: Zacks Investment Research
Bottom Line
Microsoft is without a doubt one of the best companies in the market, and now that it has had some time to consolidate its gains from earlier in the year is as appealing as ever. I think investors should keep a close eye on next week’s earnings report from Microsoft as it may set the stock, and broader market up for that year-end rally.
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Is Microsoft Stock a Buy Going into Earnings?
After the incredible excitement of ChatGPT’s release, and the integration of new Artificial Intelligence technologies into its 365 platform, Microsoft (MSFT - Free Report) stock rallied for nearly six months unperturbed. Curiously, that strong performance has been followed by nearly four months of sideways action in the stock, even as the AI hype has continued to gain momentum.
However, this consolidation in price has likely set Microsoft up for another bull-run, which I think may commence with the coming earnings announcement. Microsoft reports earnings Tuesday, October 24 after the market closes.
This price consolidation has set Microsoft up in a few ways. It has lowered its earnings multiple, which now sits at its five-year median, tamped down investors’ expectations, and built out a compelling technical chart pattern.
Furthermore, evidence of a reacceleration in the Intelligent Cloud segment, and PC sales, which have been laggards over the past year may extinguish any bearish sentiment in the stock.
Image Source: TradingView
Earnings Estimates
Even with the explosion in generative AI, Microsoft earnings estimates have stayed flat throughout 2024, giving Microsoft a Zacks Rank #3 (Hold) rating. Analysts are forecasting sales to grow 8.6% YoY to $54.4 billion and earnings to climb 12.8% to $2.65 per share. Microsoft has missed earnings estimates only once in the last five years.
Several growth drivers stand out for Microsoft. The Intelligent Cloud segment, which contributes to 42% of its overall revenue, is anticipated to bounce back, showing an estimated growth of 15.5% after a deceleration. This reflects a robust demand for digital transformation solutions, even amidst economic uncertainties.
However, while the PC market's softness could affect its personal computing business, projections from the International Data Corporation suggest a potential recovery in 2024. IDC notes that “Global PC shipments are expected to return to growth in 2024 albeit below 2019 pre-pandemic levels.”
Image Source: Zacks Investment Research
Competitors?
Of course, Microsoft is in intense competition with both Amazon (AMZN - Free Report) and Alphabet (GOOG - Free Report) L for the cloud services market. Amazon remains the leader, while Alphabet is the fastest growing. Microsoft is also growing faster than Amazon, so both it and Alphabet were able to take a few basis points of market share over the last year.
I am very curious to see growth rates in cloud computing for all the technology giants. Because of Microsoft’s leadership in AI, I wonder if businesses begin to prefer its platform, as AI integration should continue to improve systems efficiency. Alternatively, both Alphabet and Amazon begun their own foray into developing AI, so there will also be race to see who can create the best products in the space, and who can integrate it best into their own platforms.
Interestingly, Microsoft and Amazon just announced a major partnership, as Amazon is in talks to become a customer of Microsoft. Apparently, in a deal that could be worth as much as $1 billion, Amazon will be committing to a five-year agreement and a million licenses to use Microsoft’s 365 tools. The deal could be inked as soon as next month.
Valuation
Now that the stock price has taken a multi-month break, Microsoft’s earnings multiple has eased off its highs as well. After trading all the way up to 37x forward earnings, it has come down to 30.3x, which is in line with the industry average, and its five-year median.
Microsoft also pays a dividend of 0.8% and has raised the payment by an average of 10% annually over the last five years.
Image Source: Zacks Investment Research
Bottom Line
Microsoft is without a doubt one of the best companies in the market, and now that it has had some time to consolidate its gains from earlier in the year is as appealing as ever. I think investors should keep a close eye on next week’s earnings report from Microsoft as it may set the stock, and broader market up for that year-end rally.