Source: PaxForex Premium Analytics Portal, Fundamental Insight
Microsoft recently released a substantial amount of fresh data concerning its extensive technology business, presenting updated demand metrics for its key product lines and fiscal 2024 projections in its fiscal fourth-quarter earnings report.
In light of the new era of AI-powered software and services, the company's management expressed optimism about Microsoft's future prospects. However, some investors remain cautious about this costly stock, and there are valid arguments both for and against it. Let's delve deeper into these perspectives.
While Microsoft showed impressive gains in certain areas like cloud services, cybersecurity, and server products, its overall sales growth was not particularly remarkable. The revenue increase was only 8% through late June, indicating that it might not qualify as a high-growth business. One of the main factors dragging down its overall performance was the sluggish results in the PC segment, impacting the broader business outlook.
Investors looking for higher sales growth at a reasonable valuation may find Microsoft's current standing less appealing. The company is currently priced at 12 times its annual sales, which is comparable to cybersecurity specialist Palo Alto Networks. However, Palo Alto Networks recently posted an impressive 24% sales increase, which is three times higher than Microsoft's growth rate.
In contrast, video game developer Take-Two Interactive offers a more affordable price-to-sales ratio and is targeting significant growth in fiscal year 2025. This could lead some investors to argue that other tech stocks represent a better investment opportunity than Microsoft at the moment.
On the bullish side, there are compelling reasons to support Microsoft. The company holds a dominant position in several rapidly expanding industries, including cloud transition, enterprise services, video game content, cybersecurity, and artificial intelligence (AI), among others. While some of these segments are already contributing to sales and profits, there is potential for game-changing gains in the future. Microsoft's CEO, Satya Nadella, emphasized the company's continuous innovation in the tech stack to empower customers in the era of AI.
From a financial perspective, Microsoft is remarkably impressive. In the last quarter, the company generated a gross profit of $39 billion, up from $35 billion the previous year. Operating income also saw significant growth, reaching $24 billion compared to $21 billion in the previous year, amounting to an impressive 43% of sales. To put this into context, Apple's operating margin stands at around 30% of sales, while Amazon's is even lower at approximately 3%.
Owning Microsoft means gaining exposure to various tech trends that are expected to shape the next decade. Additionally, the company boasts robust sales and cash flow, making it an enticing choice for investors.
For growth stock investors, the current valuation of Microsoft might appear somewhat elevated, especially considering the sluggish demand trends the company is experiencing. Certain areas, such as consumer tech, digital advertising, and PC sales, are expected to continue facing challenges. As a result, patient investors who can afford to wait may find it advantageous to own Microsoft stock at a more attractive price in the future.
Nonetheless, purchasing Microsoft stock at its present value is still likely to be a positive addition to one's portfolio. The bearish perspective overlooks two critical aspects: Microsoft's outstanding financial performance and its growing market share. These factors are expected to propel the company's returns, surpassing market expectations, for investors who are willing to remain patient.
As long as the price is above 322.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 326.46
- Take Profit 1: 350.00
- Take Profit 2: 367.00
Alternative scenario:
If the level of 322.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 322.00
- Take Profit 1: 311.00
- Take Profit 2: 297.00
