Microsoft Stock Surpassed The Consensus In Q4, What’s Next?

Microsoft’s stock (NASDAQ: MSFT) has gained approximately 12% YTD as compared to the 14% rise in the S&P500 index over the same period. Notably, Microsoft’s peer Amazon (NASDAQ: AMZN) is up 20% YTD. Overall, at its current price of $423 per share, MSFT is trading 15% below its fair value of $498 – Trefis’ estimate for Microsoft’s valuation. 

Amid the current financial backdrop, MSFT stock has seen extremely strong gains of 100% from levels of $215 in early January 2021 to around $425 now, vs. an increase of about 45% 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 58% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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 ORCL, 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 surpassed the consensus in the fourth quarter of FY2024 (FY July-June). It posted total revenues of $64.73 billion – up 15% y-o-y, driven by an 11% rise in productivity & business processes unit, a 19% gain in the intelligent cloud, and a 14% increase in the more personal computing business. While the productivity & business processes benefited from growth in Office 365 commercial, LinkedIn, and dynamic products categories, the intelligent cloud segment was up due to a 29% jump in Azure and other cloud services revenues. Notably, the improvement in Azure and other cloud service revenues was still below the street estimates. Overall, the net income rose by 10% y-o-y to $22 billion.

The company’s revenues increased 16% y-o-y to $245.1 billion in FY 2024. While all the segments reported positive growth, the intelligent cloud was up due to Azure, productivity and business processes benefited from Office 365 commercial, and more personal computing revenue was driven by gaming. Further, the operating income grew 24% y-o-y in the year, leading to a 22% improvement in the net income to $88.13 billion. 

Moving forward, we expect the same trend to continue in the first quarter. Overall, Microsoft revenues are estimated to touch $280 billion in FY2025. Additionally, MSFT’s net income margin is likely to remain around the same level as last year, leading to a net income of $98.6 billion and an annual GAAP EPS of $13.28. This coupled with a P/E multiple of just above 37x will lead to a valuation of $498.

[1] Returns as of 8/1/2024
[2] Cumulative total returns since the end of 2016

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