Source: PaxForex Premium Analytics Portal, Fundamental Insight
In its most recent fiscal report for Q2 2024, concluding on December 31, Microsoft displayed robust financial performance. The company posted a noteworthy 18% year-over-year surge in revenue, reaching $62 billion, surpassing analysts' projections by $890 million. Additionally, earnings per share exhibited a robust growth of 33%, hitting $2.93 and exceeding the consensus forecast by $0.16.
Despite these impressive numbers, Microsoft's stock has undergone a remarkable 60% surge over the past 12 months, lingering near its peak. This raises the question of whether investors should contemplate adding more shares to their portfolios.
When dissecting the revenue distribution, Microsoft disclosed that 42% of its Q2 revenue originated from the Intelligent Cloud division, covering the Azure cloud infrastructure platform and other cloud and server products. The Productivity and Business Processes division, home to Office, Dynamics, and LinkedIn, contributed 31% of the revenue. Simultaneously, the More Personal Computing division, overseeing Windows, Xbox, Surface, Bing, and digital advertising, accounted for the remaining 27%.
Notably, Microsoft's year-over-year revenue growth accelerated for four consecutive quarters, propelled by the robust performance of its cloud and productivity divisions and the stabilization of its personal computing division. In the past year, the Intelligent Cloud business, particularly Azure, played a pivotal role in steering growth. The "Azure and other cloud services" revenue witnessed a 30% year-over-year upswing in Q2, outpacing its growth in preceding quarters.
Microsoft's strategic investments in OpenAI also contributed to its expansion, facilitating the integration of AI tools into its cloud-based services. Significantly, Azure's growth surpassed its closest competitors, marking a 30% increase compared to Amazon Web Services (AWS) with a 13% growth and Google Cloud with a 26% growth. This underscores Azure's advantageous position as an early mover in the generative AI market.
During the recent conference call, Chief Financial Officer Amy Hood expressed confidence in the sustained growth of Azure, Microsoft's cloud platform. She highlighted that Azure's growth is expected to remain stable in constant currency terms, with a significant contribution from artificial intelligence (AI), indicating the platform's likely continuity of momentum. Microsoft's strong financial performance, especially in the cloud and AI segments, positions it as an appealing choice for long-term investors.
In fiscal 2023, Microsoft's productivity and business processes division faced a slowdown as companies tightened their software spending. However, it rebounded with double-digit growth over the past year, fueled by increased adoption of Office 365, LinkedIn, and Dynamics. Dynamics is notably outpacing its larger competitor, Salesforce, in the customer relationship management (CRM) market, posting a 21% year-over-year growth in product and cloud services revenue in the second quarter, compared to Salesforce's 11% growth in its latest quarter.
The More Personal Computing division, which struggled in fiscal 2023 due to subdued sales of new PCs and gaming consoles in a post-pandemic market, has returned to growth over the past two quarters. The segment is anticipated to expand significantly as the Xbox division acquires Activision Blizzard.
Despite increased spending, particularly in its cloud, AI, and gaming ecosystems, Microsoft's operating margin expanded by 490 basis points year over year to 43.6% in the second quarter. Analysts project further margin expansion from 42.3% in fiscal 2023 to 43.7% in fiscal 2024.
Analysts foresee a compound annual growth rate (CAGR) of 15% for Microsoft's revenue and a 17% CAGR for its earnings per share (EPS) from fiscal 2023 to fiscal 2026. While these estimates should be approached with caution, Microsoft's disciplined expansion over the past decade supports the belief that it can achieve these targets.
Despite trading at 35 times forward earnings, a higher valuation compared to Alphabet (expected to grow its EPS at a similar rate), which trades at 21 times forward earnings, the author believes that Microsoft's stock is still worth buying. The company is viewed as firing on all cylinders, expanding its business, and seemingly growing faster than other tech giants in the cloud and AI markets. While near-term volatility is possible, the stock is expected to trend higher over the next few years.
As long as the price is above 390.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 413.78
- Take Profit 1: 425.00
- Take Profit 2: 445.00
Alternative scenario:
If the level of 390.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 390.00
- Take Profit 1: 375.00
- Take Profit 2: 360.00
