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Is Microsoft Stock a Buy, a Sell, or Fairly Valued After Earnings?

With strong revenue and earnings, here’s what we think of Microsoft stock.

Microsoft's logo displayed outside the company headquarters.

Microsoft MSFT released its third-quarter earnings report on April 25. Here’s Morningstar’s take for investors on the company’s latest earnings and its stock.

Microsoft Stock at a Glance

What We Thought of Microsoft’s Q3 Earnings

Results were good overall, with meaningful upside to both revenue and earnings per share relative to our expectations. All segments were ahead, with More Personal Computing strongest relative to our model. Windows and Surface, which have been under severe pressure, still came in considerably better than expected. Bing is gaining share, leaving many to speculate that the OpenAI-based search engine is going to gain more meaningful share versus Google. Guidance for the June quarter was better than expected for revenue, with cloud storage service Azure at the top end.

The results support the investment case that there is a long runway for Azure growth and that Microsoft’s wide moat remains as strong as ever. The early feedback on the use of OpenAI within Microsoft’s portfolio is new (if incremental) evidence suggesting the same. We view Microsoft as a core holding, and the company’s latest earnings support this.

Microsoft stock price in the last year

Fair Value Estimate for Microsoft

Our fair value estimate for Microsoft is $325 per share, which implies a fiscal 2023 enterprise value/sales multiple of 11 times, adjusted price/earnings multiple of 34 times, and a 3% free cash flow yield.

We model a five-year compound annual growth rate for revenue of approximately 10%. We believe revenue growth will be driven by Azure, Microsoft 365, Dynamics 365, and LinkedIn. Azure in particular is the most critical revenue driver over the next 10 years in our view, as hybrid office environments (where Microsoft excels) drive mass cloud adoption.

Read more about Microsoft’s fair value estimate.

Microsoft price/fair value ratios for the last 5 years

Economic Moat Rating

For Microsoft overall, we assign a wide moat rating arising from switching costs, network effects, and cost advantages. We believe Microsoft’s different segments and products benefit from different moat sources.

The Productivity and Business Processes segment includes Microsoft 365, Dynamics 365, and LinkedIn. We assign the segment a wide moat rating based on high switching costs and network effects.

We believe Microsoft 365 is protected by a wide moat driven by high switching costs and network effects. It accounts for about 26% of revenue and is growing in the low double digits.

We believe LinkedIn’s narrow moat is supported by network effects. The website is respected as a professional networking tool, and its large user base attracts recruiters, advertisers, and further users. We do not see a disruptive network or software tool threatening LinkedIn over the next several years.

Microsoft’s Intelligent Cloud segment includes Windows Server, Azure, Enterprise Services, and Visual Studio. We assign the segment a wide moat rating based on high switching costs, network effects, and cost advantages.

We believe high switching costs and cost advantages drive a wide moat for Azure. It is clearly the growth engine for the Intelligent Cloud segment and one of the critical products the “new” Microsoft will be built around. We estimate that revenue from Azure itself is a mid- to high-single-digit percentage of revenue, growing by more than 75% annually.

Read more about Microsoft’s moat rating.

Risk and Uncertainty

Microsoft faces various risks among its products and segments. High market share in the client-server architecture over the last 30 years means significant high-margin revenue is at risk, particularly in operating systems, office and productivity software, and servers. Microsoft is acquisitive, and while many of its small acquisitions fly under the radar, the company has had several high-profile flops, including Nokia and aQuantive. The LinkedIn acquisition was expensive but served a purpose, and we believe it’s working out well. We expect the 2022 acquisition of artificial intelligence company Nuance Communications to be digestible. But the recently announced Activision Blizzard acquisition is the company’s largest ever, and it might warrant more attention. The public cloud buildout is still in its early phases; Amazon Web Services has taken the market by storm, with Azure trailing, but the two are the clear leaders.

While we do not see significant environmental, social, or governance risks, Microsoft faces strong competition for software engineers on the hiring front, along with risks arising from potential breaches in its data centers.

Read more about Microsoft’s risk and uncertainty.

MSFT Stock Bulls Say

  • Public cloud is widely considered the future of enterprise computing. Azure is a leading service that benefits from this evolution, as well as the transition to hybrid work settings.
  • The company’s shift to subscriptions accelerated growth after initial pressure, and it has now passed the margin inflection point, with margins returning to pre-Nokia, precloud levels.
  • Microsoft has monopolylike positions with products in certain areas (OS, 365) that serve as cash cows to help drive Azure growth.

MSFT Stock Bears Say

  • Momentum is slowing in the ongoing shift to subscriptions—particularly in Microsoft 365, which is generally considered a mature product.
  • Microsoft lacks a meaningful mobile presence.
  • Microsoft is not the top player in its key sources of growth, notably Azure and Dynamics.

This article was compiled by Muskaan Hemrajani.

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The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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