Case Study: What Credible analysts are saying on Microsoft (MSFT) stock
Key Points
Performance
Microsoft (MSFT) shares rose by 2.92% this week. On a year-to-date basis, MSFT is up by 3.58%. This compares poorly to the S&P 500, which is up by approximately 6.44% during 2023 thus far.
Event & Impact
Microsoft announces Q2 fiscal 2023 earnings this week, missing Wall Street consensus estimates on the top-line but beating on the bottom-line. During Q2, Microsoft posted sales of $52.7 billion, which were up by 1.9% on a year-over-year basis, but missed Wall Street’s estimate by $450 million. MSFT’s second quarter non-GAAP EPS totaled $2.32, beating estimates by $0.01/share.
Noteworthy News:
Microsoft’s cloud growth appears to be slowing; however,the company recently made a $10 billion bet on artificial intelligence which could be the company’s next big growth driver.
Nobias Insights
55% of recent articles published by credible authors focused on Microsoft shares offer a “bullish” bias. 3 out of the 5 credible Wall Street analysts believe shares are likely to rise in value. The average price target being applied to Microsoft by these credible analysts is $248.60 which implies upside potential of approximately 0.2% relative to the stock’s current share price of $248.16.
Bullish Take Tradevestor, a Nobias 5-star rated author, said, “I believe Microsoft is perhaps the best big tech stock to own as it offers a unique mix of sticky existing business, exciting new prospects including AI and further Cloud expansion, a bit of dividend income and enormous potential for dividend growth.”
Bearish Take Nobias 4-star rated author, Cavenagh Research, said, “Reflecting on a challenging growth outlook, I now downgrade my EPS expectations for Microsoft Corporation through 2025, and based on a 8.75 cost of equity, I now model a fair implied share price for MSFT equal to $211.06/share.”
MSFT Jan 2023
Microsoft (MSFT) posted its Q2 fiscal 2023 results this week, initially causing shares to fall. Microsoft opened trading the next day down roughly 4%; however, throughout the rest of the week, shares rallied and MSFT ended up rallying by 2.92% for the week, overall. This 2.92% rally pushed MSFT’s year-to-date gains up to 3.58%. This compares poorly to the S&P 500, which is up by 6.44% during 2023 thus far; however, it’s a bullish trend reversal for MSFT shares, which are still down by 17.24% during the trailing twelve month period.
Bearish Nobias Credible Analysts Opinions:
Nobias 4-star rated author, Cavenagh Research, covered Microsoft’s Q2 fiscal 2023 results this week. Cavenagh Research published an article at Seeking Alpha titled, “Microsoft: Bulls Are Still Standing On Shaky Legs” which stated, “Although revenues are up by approximately 2% versus the same period one year earlier ($51.7 billion), Microsoft failed to meet consensus analyst expectations by about $405 million ($58.15 billion estimated, according to data compiled by Refinitiv).”
The author moved onto MSFT’s bottom-line results, writing, “Operating income for the period came in at $20.4 billion, representing a 9% year over year contraction as compared to $22.25 for the same period in 2021. They continued, “Net-income was recorded, $16.4 billion ($2.20/share), which is a 15% contraction respectively.”
Importantly, Cavenagh Research highlighted the company’s near-term guidance, which was “softer than hoped” for. They wrote, “Microsoft forecasted that revenues for the upcoming quarter are likely to fall somewhere between $50.5 billion and $51.5 billion. This is around $1.5 billion less than what analysts had predicted at midpoint, and would represent only a 3% year over year increase as compared to Q3 in 2022.”
The author concluded, “Reflecting on a challenging growth outlook, I now downgrade my EPS expectations for Microsoft Corporation through 2025, and based on a 8.75 cost of equity, I now model a fair implied share price for MSFT equal to $211.06/share.”
Dina Bass, a Nobias 4-star rated author, also covered Microsoft’s earnings in an article posted at Yahoo Finance this week. She said, “Microsoft posted adjusted profit in the period ended Dec. 31 of $2.32 a share, while sales rose to $52.7 billion.”
Bass put a bearish spotlight on the results, stating, “Revenue growth of 2% in the second quarter was the slowest in six years, and Microsoft last week said it’s firing 10,000 workers.” She also said, “Excluding currency impacts, Azure revenue gained 38% for the full quarter, slightly topping analyst predictions.”
With regard to Microsoft’s Azure Cloud segment, Bass said, “After years of double-digit revenue gains fueled by Microsoft’s accelerating cloud business, and robust growth during the technology spending spree of the Covid-19 pandemic, Chief Executive Officer Satya Nadella acknowledged that the industry is going through a period of deceleration and will need to adjust.” It appears that one way Microsoft plans to adjust is further investments into artificial intelligence.
Bullish Nobias Credible Analysts Opinions:
Recently, news broke that Microsoft was investing billions of dollars into OpenAI, which is best known for creating ChatGPT. Shawn Johnson, a Nobias 4-star rated author, covered this M&A activity in a recent article..
Johnson wrote, “OpenAI is the hottest AI lab with one of the busiest and most exciting products out there: ChatGPT. And Microsoft is a great friend of this. On Monday, the two companies announced that Microsoft is investing $10 billion in OpenAI (that’s on top of the $3 billion Microsoft has given to OpenAI since 2019), and that Microsoft will add ChatGPT to its Bing search engine.” He continued, “Following news of Microsoft’s $10 billion investment, Wedbush analyst Daniel Ives wrote that ChatGPT was a “potential game-changer” for Microsoft, and that the company was not going to “repeat the same mistakes” of missing out on social and mobile.
Johnson said, “Perhaps OpenAI’s technology is a game changer. Maybe it’s just a party trick. Either way, Microsoft’s got it, and a lot of people think it’s amazing.” He also stated, “It appears that Microsoft is on the verge of becoming something it hasn’t been for a long time: cutting edge.”
There are investors who own Microsoft shares not because of its cutting edge technology, but instead, because of its reliably growing dividend. Headlines surrounding the fact that Microsoft’s Q2 free cash flow didn’t cover the dividend sparked concern for those individuals after the company’s Q2 report, causing, Tradevestor, a Nobias 5-star rated author, to cover the company’s dividend safety in an in-depth report published at Seeking Alpha this week.
In that article, Tradevestor broke down the company’s earnings results before saying,”Let us see how Microsoft's dividend coverage looks after this recent quarterly result.” They highlighted the company’s Q2 data, stating:
Total shares outstanding: 7.454 Billion
Current quarterly dividend per share: $0.68
Quarterly FCF required to cover dividends: $5.068 Billion
Microsoft's FCF in Q2: $4.9 Billion
Microsoft's Payout ratio using Q2 FCF: 103% ($5.068 billion divided by $4.9 billion). OUCH!
Microsoft's Q2 EPS reported: $2.32
Payout ratio using Q2 EPS: 29% ($0.68 divided by $2.32)
The author continued, “What's with that massive decline in FCF? As shown below, that's a 43% decline YoY compared to the $8.615 Billion recorded in Q2 2022. Is the dividend in danger? Maybe. Maybe not. Only way to find out is to read the fine prints as well to see how the annual FCF (trailing twelve months) looks.”
After looking through Microsoft’s report, they stated, “FCF took a massive hit this quarter due to a tax payment related to R&D.” Tradevestor continued, “Ignoring this impact, the apples-to-apples comparison results in a FCF decline of 16%, a far cry from the 43% that showed up on first glance. In other words, the adjusted Q2 FCF was $7.254 Billion, which gives Microsoft a Q2 FCF payout ratio of about 70%.”
Furthermore, they examined the company’s trailing 12 month data, and said, ”Microsoft's Payout ratio using TTM FCF: 34% ($20.274 Billion divided by $59.63 billion).” With that in mind, the author concluded, “Given the balance sheet and fundamental strengths, I fully expect another juicy dividend increase (10% at least) from Microsoft in September, marking its 14th consecutive annual dividend increase.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
“Overall,” Tradevestor wrote, “I believe Microsoft is perhaps the best big tech stock to own as it offers a unique mix of sticky existing business, exciting new prospects including AI and further Cloud expansion, a bit of dividend income and enormous potential for dividend growth.”
Overall bias of Nobias Credible Analysts and Bloggers:
After MSFT’s nearly 3% rally this week, it appears that authors and analysts are torn on whether or not its rally will continue. 55% of recent articles published by credible authors of MSFT stock have expressed a “Bullish” bias.
Furthermore, 3 out of the 5 credible Wall Street analysts that the Nobias algorithm tracks who have expressed an opinion on MSFT shares believe that they’re likely to increase in value. However, after its recent rally, MSFT closed the week trading for $248.16/share. This is essentially in-line with the average price target of $248.60 that credible analysts have placed upon shares, implying upside potential of less than two-tenths of a percent.
Disclosure: Nicholas Ward is long MSFT. Nicholas Ward wrote this article for Nobias at their request with the intention of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.