Microsoft Stock Is Up 45% YTD And Outperformed The Consensus In Q1

Microsoft’s stock (NASDAQ: MSFT) has gained approximately 45% YTD as compared to the 10% rise in the S&P500 index over the same period. Further, at its current price of $346 per share, it is trading 6% below its fair value of $367 – Trefis’ estimate for Microsoft’s valuation. 

Amid the current financial backdrop, MSFT stock has seen extremely strong gains of 55% from levels of $220 in early January 2021 to around $345 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. However, the increase in MSFT stock has been far from consistent. Returns for the stock were 52% in 2021, -28% in 2022, and 45% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 11% in 2023 (YTD) – indicating that MSFT underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Information Technology sector including AAPL, NVDA, and AVGO, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.  Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could MSFT face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

The technology giant outperformed the street estimates in the first quarter of FY2024 (FY July-June). It reported a 13% y-o-y increase in net revenues to $56.5 billion, driven by a 13% growth in the productivity & business processes segment and a 19% rise in the intelligent cloud division. While the productivity & business processes benefited from higher Office 365 commercial revenues, growth in intelligent cloud units was due to Azure and other cloud services. On the cost front, the operating expenses as a % of revenues decreased in the quarter. Overall, it resulted in a 27% y-o-y improvement in the net income to $22.3 billion. 

The company’s revenues increased 7% y-o-y to $211.9 billion in FY 2023. It was because of growth in productivity & business processes and intelligent cloud units, partially offset by lower revenues in the personal computing division. That said, the operating expenses as a % of revenues witnessed an unfavorable increase. Altogether, the net income declined by 1% y-o-y to $72.4 billion.  

Moving forward, we expect the same trend to continue in Q2. Overall, Microsoft revenues are forecast to touch $222.2 billion in FY2024. Additionally, MSFT’s net income margin is likely to see a slight improvement in the year. It will likely result in a net income of $78.7 billion and an annual GAAP EPS of $10.63. This coupled with a P/E multiple of just below 35x will lead to a valuation of $367.

[1] Month-to-date and year-to-date as of 11/2/2023
[2] Cumulative total returns since the end of 2016