Microsoft Inc

Weekly Valuation  — Valutico | 5 August 2022

Link to the detailed valuation: click here

Microsoft shares rose 5% in extended trading on Tuesday after the software maker issued an upbeat earnings forecast for the year ahead, despite its quarterly results falling short of analysts’ expectations.

Here are the company’s results:

Earnings: $2.23 per share, adjusted, versus $2.29 per share as expected by analysts.

Revenue: $51.87 billion versus $52.44 billion expected by analysts.

Microsoft posted its slowest revenue growth since 2020 in the quarter ended 30 June, at 12% year-on-year, and earnings per share were below consensus for the first time since 2016, with net income rising 2% to $16.74 billion.

For the fiscal first quarter, Microsoft expected revenue of $49.25 billion to $50.25 billion. The midpoint of the range of $49.75 billion implies revenue growth of about 10%, reflecting deteriorating PC sales and slower growth in cloud infrastructure. Analysts polled by Refinitiv had expected more at $51.49 billion. The company’s implied gross margin of 69.85% was above analysts’ consensus of 69.30%.

In the fourth quarter, the biggest challenge was the deterioration in foreign exchange rates relative to the US dollar. Microsoft said this reduced revenue by $595 million and profit by 4 cents a share. In June, Microsoft had reduced its quarterly profit and revenue solely because of the foreign exchange fluctuations. Revenue and profit for the quarter were at the lower end of the range Microsoft had presented in June.

Further slowdowns were experienced across the business due to similar factors cited by most companies — logistical issues related to COVID, the war in Ukraine (Microsoft decided to stop selling services and products in Russia) and a general decrease in consumer and ad spending due to higher inflation. 

Excluding the after-hours surge, Microsoft shares are down 25% so far this year, while the S&P 500 index of US stocks is down about 18%. Considering the results only marginally missed analysts’ expectations, Microsoft’s earnings seem fairly resilient in the current market. The question arises whether the significant decline in Microsoft’s share price is warranted and whether the stock is starting to present value at these levels.

Valutico analysis

We have performed a comparable multiples analysis and a DCF WACC. In the former, we compared Microsoft with peers such as Sony, Alphabet, and Apple. We arrived at a result that is well below the market capitalization of about USD 2.02 trillion — applying the median of its peers’ multiples to Microsoft results in a valuation of between USD 1.2 and 1.5 trillion. Microsoft is clearly deemed by the market to be more valuable than these peers as it is trading at the highest multiples of the group. . The DCF WACC analysis perfectly justifies the current market cap.  Using a WACC of 6.8%, we arrived at a result of USD 2.05 trillion — almost exactly the current market capitalization of 2.1 trillion. 

In summary, the market considers Microsoft as a premium stock compared to its peers, and the current market cap seems reflective of what the market deems its fair value. Will Microsoft’s earnings remain resilient per analyst estimates, is there a significant downside, or does this present a good opportunity to buy a blue chip tech stock at a price that is 30% cheaper than a year ago? 

Link to the detailed valuation: click here