Source: PaxForex Premium Analytics Portal, Fundamental Insight
As 2023 approaches its conclusion, investors are honing in on the appealing attributes of Microsoft. The tech giant's stock has surged by over 50% as of mid-December, outperforming the Nasdaq Composite's 38% increase thus far.
Currently, the stock is under the control of bullish sentiments, driven by positive indicators in enterprise tech spending, artificial intelligence (AI), and economic expansion. However, as with any investment, Microsoft is not immune to potential challenges that could hamper returns for shareholders. Let's delve into the optimistic outlook and explore a critical factor that may pose a threat to investors' returns.
Microsoft's array of software services is steadily increasing in value for its clientele, marking a positive trajectory for its long-term growth prospects. Although a significant portion of this value stems from the burgeoning realm of AI - an investment trend that may be subject to overhyping on Wall Street - Microsoft is reaping tangible benefits from AI applications. These include heightened productivity across domains such as cloud enterprise services, cybersecurity, and personal computing.
According to statements made in a late October earnings update, technology plays a pivotal role in the recent 23% growth of Microsoft's cloud segment. The company's overall revenue witnessed a 12% increase, with burgeoning divisions compensating for sluggish outcomes in sectors like computing hardware. CEO Satya Nadella emphasized the rapid infusion of AI across every role and business process, aiming to drive productivity gains for customers, subsequently enhancing Microsoft's profit margin.
In contrast to many software-as-a-service companies that struggle with weak earnings, Microsoft stands out as one of the most profitable large companies globally. In the last quarter, gross profit reached $40 billion, equivalent to 71% of sales. Operating income experienced a 24% surge, reaching nearly 50% of sales. These achievements occurred despite a relatively modest growth environment and substantial spending in areas like data centers and research and development.
Microsoft's robust cash flow is noteworthy, with over $30 billion in operating cash generated in the past three months alone. This financial strength empowers the management to safeguard the tech titan's dominant market share while also providing the flexibility to steadily increase dividends.
The primary concern lies in the fact that investors currently need to pay a premium to access these positive factors associated with Microsoft. Presently, Microsoft shares are valued at nearly 13 times sales, a notable increase from the price-to-sales ratio of 9 at the beginning of the year. This elevated premium heightens the risk of experiencing subpar returns due to overpaying for the business. A comparison can be drawn with Apple, which, although less profitable and exhibiting slower growth, is available at a price-to-sales ratio of 8.
Nevertheless, Microsoft remains an appealing growth stock investment, ticking off numerous boxes. By investing in a single stock, you gain exposure to various promising software niches, including cybersecurity and cloud enterprise services. Additionally, you secure a significant presence in the expanding field of generative AI, with positive implications for software and business productivity.
For those concerned about the current stock price, it might be worthwhile to monitor for potential pullbacks in the market or the tech sector. Such occurrences are frequent, and the next one could offer a more compelling entry point for this outstanding tech business.
As long as the price is above 362.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 369.27
- Take Profit 1: 382.00
- Take Profit 2: 395.00
Alternative scenario:
If the level of 362.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 362.00
- Take Profit 1: 351.00
- Take Profit 2: 340.00
