Source: PaxForex Premium Analytics Portal, Fundamental Insight
Microsoft has experienced significant growth in recent years, with its market capitalization nearly tripling over the past three years. The company has joined the exclusive $3 trillion club, alongside Apple.
Despite this impressive trajectory, Microsoft’s stock has recently faced a downturn. As of September 5, the stock has fallen over 12% since reaching an all-time high on July 5. Additionally, it has lagged behind the S&P 500 this year, a surprising development given its strong performance earlier in the year.
While it is essential to maintain a long-term perspective when evaluating a stock's performance, Microsoft’s recent decline since July is noteworthy. Investors might be questioning whether now is a good time to buy or if they should wait for a more favorable moment.
Microsoft continues to deliver solid financial results, with its latest quarter showing a 15% increase in both revenue and operating income year over year - an impressive feat for such a large company. Earnings per share (EPS) reached $2.95, surpassing analysts' expectations and more than doubling from five years ago. This growth in EPS highlights Microsoft’s ability to enhance profitability while maintaining steady growth. The reduction in outstanding shares by approximately 3% over the past five years further underscores the company's focus on improving earnings.
One area of concern in Microsoft’s latest earnings report is its cloud platform, Azure. Although Microsoft does not disclose specific revenue figures for Azure alone, the combined revenue from "Azure and other cloud services" rose by 29% year over year. This represents a deceleration compared to previous quarters, but it does not necessarily signal a major issue.
Given the significant focus on artificial intelligence (AI) and its expected benefits for cloud platforms like Azure, investors are closely scrutinizing this segment of Microsoft's business. However, the full impact of AI is still unfolding.
Microsoft is planning to increase its capital expenditures, with the majority allocated to its cloud business and AI infrastructure development. In fiscal 2024, the company spent $55.7 billion overall, with $19 billion in the fourth quarter alone. While higher spending may raise concerns for investors, it is crucial for Microsoft to sustain its competitive edge against Amazon Web Services (AWS), the leading cloud provider with a 31% market share. Azure, holding a 25% share, remains well-positioned ahead of third-place Google Cloud, which has an 11% share. Although AI’s immediate effects on Azure may not yet be fully realized, the platform is still expected to experience significant growth.
Microsoft is not typically known as a dividend stock, but it offers the highest dividend yield among the five "Magnificent Seven" companies that do pay dividends (Amazon and Tesla do not). Its quarterly dividend of $0.75 yields just over 0.7%. Despite this modest yield, Microsoft has a track record of regular dividend increases, including a 10% hike in September 2023. This consistency contributes positively to total returns, which have exceeded stock price appreciation by over 150% in the past decade.
Although Microsoft's dividend alone will not drive the stock, it provides an additional income stream that complements its strong growth. Despite the high forward price-to-earnings (P/E) ratio of 31, Microsoft remains a premium investment. The question for investors is whether the premium price is justified. Given Microsoft’s robust core businesses and growth potential in the cloud sector, many long-term investors may find the current valuation reasonable.
While the price remains above 400.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 405.53
- Take Profit 1: 420.00
- Take Profit 2: 430.00
Alternative scenario:
If the level 400.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 400.00
- Take Profit 1: 390.00
- Take Profit 2: 380.00
