Morningstar

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

Watching capex plans and Azure, here’s what we think of Microsoft stock.

7 January 2025, Bavaria, Munich: The Microsoft logo and lettering can be seen on the Microsoft Deutschland GmbH headquarters building in Parkstadt Schwabing in Munich (Bavaria) on January 27, 2025. Microsoft Corporation is the world's largest software manufacturer and one of the largest companies in the world.
Matthias Balk via AP
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Microsoft Corp
(MSFT)

Microsoft is set to release its fiscal fourth-quarter 2025 earnings report on July 30. Here’s Morningstar’s take on what to look for in Microsoft’s earnings and outlook for the stock.

Key Morningstar Metrics for Microsoft

Earnings Release Date

  • Wednesday, July 30, after the close of trading

What to Watch for in Microsoft’s Q4 Earnings

  • Anything on artificial intelligence. The firm is making a big bet with capex, so any green shoots here are helpful.
  • Azure has been generally strong but capacity-constrained. Management has been talking about the capacity issues fading away in previous quarters.
  • The company has done two rounds of layoffs this year. It said the first round was skewed to gaming and the second was for reducing management layers. Any additional color or specific financial impact will be interesting. Margins should be fine, but with all the recent capex, depreciation will start ramping, and we wonder whether the layoffs were in anticipation of this.
  • We’ll look for anything about capex. Reports have surfaced a couple times in the last couple months that Microsoft is slowing its plans here. We expect this to start moderating.

Fair Value Estimate for Microsoft

With its 3-star rating, we believe Microsoft’s stock is fairly valued compared with our long-term fair value estimate of $505, which implies a fiscal 2025 enterprise value/sales multiple of 13 times and an adjusted price/earnings multiple of 38 times.

We model a five-year compound annual growth rate for revenue of approximately 13%, including the Activision acquisition. We envision stronger revenue growth ahead, as Microsoft’s prior decade was bogged down by the downturn in 2008, the complete evaporation of mobile handset revenue from the disposal of the Nokia handset business, as well as the onset of the model transition to subscriptions (which initially results in slower revenue growth). However, we believe macro and currency factors will pressure revenue in the near term.

Read more about Microsoft’s fair value estimate.

Economic Moat Rating

For Microsoft overall, we assign a wide economic moat, arising primarily from switching costs, with network effects and cost advantages as secondary moat sources. Based on the company’s segments, we believe the productivity and business processes and intelligent cloud segments have earned wide moats, while the more personal computing unit warrants a narrow moat. We believe Microsoft’s moat will probably allow the company to earn returns in excess of its cost of capital over the next 20 years.

Read more about Microsoft’s economic moat.

Financial Strength

We believe Microsoft enjoys a position of excellent financial strength, arising from its strong balance sheet, growing revenue, and high and expanding margins. As of June 2024, Microsoft had $76 billion in cash and equivalents, offset by $52 billion in debt, resulting in a net cash position of $24 billion. Gross leverage is at 0.5 times fiscal 2024 EBITDA.

Our base case assumes that revenue grows at a healthy pace, driven by Azure public cloud adoption, Office 365 upselling efforts, AI adoption, and broader digital transformation initiatives. We see strong margins improving further over the next several years. Free cash flow margin has averaged 30% over the last three years, which we expect to generally improve over time.

Read more about Microsoft’s financial strength.

Risk and Uncertainty

We assign Microsoft a Morningstar Rating of Medium. The firm faces risks that vary among the 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 OS, Office, and Server. Microsoft has thus far been successful in growing revenues in a constantly evolving technology landscape, and it is enjoying success in both moving existing workloads to the cloud for current customers and attracting new clients directly to Azure. However, it must continue to drive revenue growth of cloud-based products faster than revenue declines in on-premises products.

Read more about Microsoft’s risk and uncertainty.

MSFT Bulls Say

  • Public cloud is widely considered the future of enterprise computing, and Azure is a leading service that benefits the evolution to first to hybrid environments, and then ultimately to public cloud environments.
  • Microsoft 365 continues to benefit from upselling into higher-priced stock-keeping units, as customers are willing to pay for better security, and Teams Phone, which should continue over the next several years.
  • Microsoft has monopoly like positions in various areas (OS, Office) that serve as cash cows to help drive Azure growth.

MSFT Bears Say

  • Momentum is slowing in the ongoing shift to subscriptions, particularly in Office, 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 James Ubi.

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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