Microsoft (MSFT - Free Report) saw its stock price climb to a new all-time high following the release of its Q4 and fiscal 2018 financial results on July 19. Shares of MSFT have slipped slightly since then, but Microsoft stock still looks like a strong buy at the moment. Let’s find out why.
Strong Business Model
Microsoft began to adapt to the changing digital age years ago, adding new segments and offerings as the traditional PC business declined. Today, the company has established itself as an artificial intelligence and IoT firm, while maintaining its strong position as a software and hardware provider. MSFT’s string of acquisitions, which includes LinkedIn, play significant roles at the company. Looking ahead, the firm’s June purchase of open source software powerhouse GitHub might prove vital.
But, Microsoft’s cloud computing venture looks like it is prepared to help propel the company forward more than any other business. The firm now competes directly against Amazon (AMZN - Free Report) , IBM (IBM - Free Report) , and Google parent Alphabet (GOOGL - Free Report) in this booming sector. Microsoft recently secured a five-year deal with Walmart (WMT - Free Report) and boasts many other major clients as well.
Microsoft’s Intelligent Cloud revenues jumped 23% in the fourth quarter from $7.82 billion to hit $9.61 billion—the biggest of its three key business units. The company’s widely popular Azure cloud business skyrocketed by 89%. For the year, cloud revenues climbed from $27.41 billion to $32.22 billion. Intelligent Cloud revenues accounted for over 29% of Microsoft’s $110.36 billion in total fiscal 2018 revenues.
Microsoft still lags Amazon’s current cloud dominance, which can be attributed to its roughly seven-year head start in the segment. Still, there is plenty of room to grow, with the overall spend on cloud infrastructure services up 50% in Q2 from the year-ago period, according to the most recent data from Synergy Research Group. Amazon reportedly held 34% of total market share, with Microsoft coming in second at 14%, trailed by IBM’s 8%, Google’s 6%, and Alibaba’s (BABA - Free Report) 4%.
On top of MSFT’s growing cloud computing business, the historic tech company is expanding in its more traditional segments as well. Its Productivity and Business Processes unit revenues, which includes its Office division, climbed by 13% last quarter to $9.67 billion. Meanwhile, More Personal Computing revenues surged 17% to hit $10.8 billion. Personal Computing features its Windows and gaming businesses, among others.
Investors should also remember that Microsoft’s overall Q4 revenues jumped by 17% to reach $30.09 billion, while its bottom line popped as well. MSFT’s growth is impressive for a company of its size and age and demonstrates just how powerful its core business remains and how impactful its newer initiatives are.
Stock Price Movement
Microsoft’s strong price movement might not be as talked about as Amazon or Netflix (NFLX - Free Report) , but shares of MSFT have soared over 236% during the last five years. More recently, MSFT stock has doubled its industry’s average climb, up 127% over the last three years, including a roughly 88% surge over the last 24 months. Year to date, Microsoft stock is up over 24%, which crushes the S&P 500’s 5% climb.
MSFT stock is currently trading at 24.6X forward 12-month Zacks Consensus EPS estimates, which marks a significant discount compared to its industry’s 32.3X average. Microsoft has traded as low as 21.9X over the last year and as high as 26.9X. MSFT is also trading below its one-year median of 24.1X. However, historically speaking, Microsoft’s valuation picture appears just a bit stretched.
Looking ahead, Microsoft’s Q1 revenues are projected to climb by nearly 13% to hit $27.69 billion, based on our current Zacks Consensus Estimate. For fiscal 2019, MSFT’s revenues are expected to reach $121.84 billion, which would mark more than a 10% climb from the $110.36 billion it recently reported.
At the other end of the income statement, Microsoft’s first-quarter earnings are projected to climb by over 14% to hit $0.96 per share, while its full-year EPS figure is expected to pop by over 9.5%.
MSFT has earned 10 upward earnings estimate revisions for Q1 over the last 30 days, against zero downgrades. More impressively, the company has earned 15 full-year earnings revisions during this same time period, with 100% agreement to the upside.
Microsoft is currently a Zacks Rank #1 (Strong Buy) that appears ready to continue to grow, especially in key areas such as cloud computing.
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