October 24, 2023, $330.53
Business Overview:
- Microsoft is a technology company involved in software, services, devices, and solutions. It operates through three main segments:
- Productivity and Business Processes: Includes Office products, Microsoft Teams, Office 365, LinkedIn, and Dynamics business solutions.
- Intelligent Cloud: Encompasses Azure, Server products, and cloud services, as well as Enterprise Services.
- More Personal Computing: Involves Windows, Devices like Surface and gaming, and Search and news advertising.
- Microsoft was founded in 1975 by Paul Allen and Bill Gates and is headquartered in Redmond, Washington.
Maverick Guidance:
- Short-term technical buy/sell recommendation: BUY
- Long-term portfolio recommendation: BUY
- In the opinion of many, Microsoft represents the Dow 30’s superior company.
- 10-year Average Annual Total Return: +27.8% (through Oct 23, 2023) (#1 in Dow 30)
Consideration for Maverick Portfolio:
- MSFT is appropriate for all Mavericks regardless of risk tolerance.
Internal Strength/Weakness
Strengths:
- Brand Loyalty: Microsoft’s long-standing position as a leading OS and software provider has established strong brand loyalty among users. With more than 90% market share in PC OS, many people are familiar with and continue to use Microsoft products. Even open-source OS options struggle to compete due to this loyalty.
- Brand Reputation: Microsoft’s brand is recognized as one of the most valuable in the world, with a value of $57.8 billion. It’s ranked 7th by Forbes, and its reputation contributes to increased sales and market share.
- Easy-to-Use Software: Microsoft’s Windows OS and Office software are popular not only because of the company’s market dominance and strong distribution channels but also because of their quality and user-friendliness.
- Strong Distribution Channels: Microsoft collaborates with major computer hardware producers and retailers, ensuring that computers come with pre-installed Windows software. Strategic investments in companies like Dell and Nokia further solidify these relationships.
- Robust Financial Performance: Microsoft’s financial performance is impressive, with a +15% revenue growth from FY 2020 to 2021. The company also holds over $130 billion in cash and cash equivalents, which can be used for acquisitions and substantial investments in research and development.
Weaknesses:
- Poor acquisitions and investments. Few of Microsoft’s acquisitions were successful and brought revenues, products, and new skills and competencies to the company. Massive, LinkExchange, WebTV, and Danger are just a few examples of multimillion-dollar acquisitions made by Microsoft but soon shut down or divested.
- Dependence on hardware manufacturers. Microsoft is a giant software corporation that does not produce its own hardware and depends on computer hardware manufacturers to develop Windows OS products. If cheap and popular alternative OS would appear, hardware manufacturers may choose the alternative, and Microsoft could do little to change the situation.
- Criticism over security flaws. Windows OS, the main Microsoft product, has been heavily criticized for being weak against various virus attacks. Compared to other OS, Windows is the least protected against such attacks.
- Mature PC markets. Only recently has Microsoft entered the mobile technology sector and still heavily depends on its OS and software sales for standalone and laptop computers. The market for these products has matured, and Microsoft will find it harder to grow revenues in these sectors.
- Slow to innovate. Microsoft has huge R&D resources and a great position to enter new markets with innovative products but constantly failed to do so. It had an opportunity to be the first player in online advertising but missed the opportunity. Its entrance to mobile OS was too late, while Google and Apple captured the market share.
External Opportunities/Threats
Opportunities:
- Poor Acquisitions and Investments: Microsoft has a history of unsuccessful acquisitions that didn’t bring the company the expected revenues, products, or skills. Examples like Massive, LinkExchange, WebTV, and Danger highlight this issue.
- Dependence on Hardware Manufacturers: Microsoft, primarily a software company, relies on computer hardware manufacturers to develop Windows OS products. If a cheaper and more popular alternative OS emerges, hardware manufacturers might switch, posing a significant challenge for Microsoft.
- Criticism Over Security Flaws: Windows OS, Microsoft’s flagship product, has faced criticism for its vulnerability to virus attacks. It’s considered less secure than other operating systems, affecting its reputation.
- Mature PC Markets: Microsoft has traditionally depended on OS and software sales for personal and laptop computers. These markets have matured, making it more challenging for the company to achieve significant revenue growth in these sectors.
- Slow to Innovate: Despite having substantial research and development resources, Microsoft has been slow to enter new markets with innovative products. It missed opportunities in online advertising and entered the mobile OS market relatively late, allowing competitors like Google and Apple to dominate.
Threats:
- Intense Competition in Software Products: Microsoft faces fierce competition in the software market, especially for operating systems in both PC and mobile segments. Competitors like Google and Apple have already established strong positions.
- Changing Consumer Needs and Habits: Microsoft’s market share in these areas is relatively modest with the shift from traditional laptops and PCs to smartphones and tablets. Adapting to evolving consumer preferences is a challenge.
- Open-Source Projects: The rise of successful open-source projects, such as Linux OS and Open-Source Office, provides free alternatives to Microsoft’s paid products, potentially eroding its market share.
- Potential Lawsuits: Microsoft has a history of lawsuits, some resulting in significant losses. Ongoing or future legal battles could be costly regarding time and resources.
Market Guidance:
- Consensus Analyst Ratings— MarketBeat = MODERATE BUY, TipRanks = STRONG BUY
- 35 Wall Street analysts have offered 12-month price targets in the last 3 months. There are 31 Buy, 4 Hold, and zero Sell. (from TipRanks)
- Based on 35 Wall Street analysts offering 12-month price targets in the last 3 months, the average price target is $398.22, with a high forecast of $440.00 and a low forecast of $298.10. The average price target represents a +20.5% change from the last price of $330.53. (from TipRanks)
- Dividend Yield: $0.75 per share paid quarterly to yield 0.83%.
- Dividend growth for 15 years. (from TipRanks)
- Technical Sentiment (based on Technical Indicators and Moving Averages):
- com = Daily (STRONG BUY) and Weekly (STRONG BUY)
- TipRanks = Daily (BUY) and Weekly (STRONG BUY)
Value Line Guidance:
- Company Financial Strength Rating: A++
- Share Price Safety, Market Timing, Technical Rank: 1=best. 5=worst
- Share Price Safety: 1 of 5
- Market Timing: 2 of 5
- Technical Rank: 1 of 5
- Beta: 90
- Stock’s Price Stability: 95/100
- Price Growth Persistence: 100/100
- Earnings Predictability: 95/100
- Future Average Annual PE: 23
- Average Annual Revenue Growth in the past 5 years: +13.5%
- Average Annual Revenue Growth for the next 5 years: +10.5%
- Average Annual Cash Flow Growth in the past 5 years: +22.0%
- Average Annual Cash Flow Growth for the next 5 years: +10.5%
- Average Annual Earnings Growth in the past 5 years: +22.0%
- Average Annual Earnings Growth for the next 5 years: +12.5%
- Average Annual Dividend Growth in the past 5 years: +10.0%
- Average Annual Dividend Growth next 5 years: +8.5%
- Average Annual Dividend Yield 3 to 5 years: +1.0%
Financial Performance
- 10-year Average Annual Total Return: +27.8% (through Oct 23, 2023) (#1 in Dow 30)
- EPS 2022: $9.21 2023: $9.68 2024: e$10.50 (from Value Line Quarterly Report)
- Average Annual PE: 23 (VL Quarterly Report)
- PEG Ratio: 2.24 (FinViz)
- Beta: 0.89 (FinViz)
Quarterly Operations Review:
September 2023 Q1 FY 2024
Oct. 24 Highlights from the first quarter of fiscal year 2024 compared with the first quarter of fiscal year 2023 included:
- Microsoft Cloud revenue increased +24% to $31.8 billion.
- Office Commercial products and cloud services revenue increased by +15%, driven by Office 365 Commercial growth of +18%.
- Office Consumer products and cloud services revenue increased +3%, and Microsoft 365 Consumer subscribers grew to 76.7 million.
- LinkedIn revenue increased by +8%.
- Dynamics products and cloud services revenue increased +22%, driven by Dynamics 365 growth of 28%.
- Server products and cloud services revenue increased +21%, driven by Azure and other cloud services growth of 29%.
- Windows revenue increased by +5%, with Windows original equipment manufacturer licensing (“Windows OEM”) revenue growth of +4% and Windows Commercial products and cloud services revenue growth of 8%.
- Devices revenue decreased -22%.
- Xbox content and services revenue increased by +13%.
- Search and news advertising revenue, excluding traffic acquisition costs, increased by +10%.
- Statements in MD&A:
- The industry trends point to a dynamic and highly competitive landscape with frequent technological and business model changes. Microsoft focuses on innovation and research to cater to changing customer demands, industry trends, and competitive pressures.
- Economic conditions, challenges, and risks include evolving market competition, rapid changes in device preferences, and global economic and geopolitical factors. The company anticipates increased operating costs due to cloud, AI infrastructure, and device investments. It also acknowledges the potential impact of supply chain disruptions on its device manufacturing.
- The company recognizes the importance of attracting and retaining skilled employees globally. Additionally, as a significant portion of its revenue and expenses comes from international operations, currency fluctuations may affect financial results.
June 2023 Q4 FY 2023
- Microsoft reported strong results for Q4 FY 2023, with an approximately +8% YoY increase in revenue to $56.2 billion.
- The full-year revenue increased by 7%, and net income over the 12-month period rose by +20% to $20.1 billion.
- The Intelligent Cloud segment, driven by Azure and cloud services, grew by about +20%, accounting for approximately 43% of total revenue.
- Other segments, Productivity and Business Processes (33% of total revenue) and More Personal Computing (25% of total revenue), saw +10% higher and -3% lower growth, respectively.
- Full-year earnings increased to $9.81 per share from $9.21 in the previous year.
- Revenue from LinkedIn rose by +5% during the quarter.
March 2023 Q3 FY 2023
- Microsoft reported strong results for Q3 FY 2023, with a 7% YoY increase in revenue to $52.9 billion.
- Net income rose by 9% to $18.3 billion during the same period.
- The Intelligent Cloud segment, driven by Azure and cloud services, grew by 27%, accounting for approximately 42% of total revenue.
- Other segments, Productivity and Business Processes (33% of total revenue) and More Personal Computing (25% of total revenue), saw 10% higher and 9% lower growth, respectively.
- Earnings per share increased to $2.45, up from $2.22 in the previous year.
- Microsoft laid off around 10,000 employees in the fiscal third quarter, representing roughly 5% of the company’s workforce.
- The company’s expansion plans include the planned acquisition of video game maker Activision, although the FTC has filed a lawsuit challenging the $69 billion deal.
- Microsoft’s partnership with OpenAI, particularly ChatGPT, has the potential to impact search engines and is expected to be incorporated into Microsoft’s products.
- Slowing demand for personal computers is a challenge, and revenue from Windows OEM and Devices is expected to decline in the June quarter.
December 2022 Q2 FY 2023
- Microsoft reported mixed results for Q2 FY 2023, with a +2% YoY increase in revenue to $52.7 billion.
- Net income decreased by +12% to $20.4 billion during the same period.
- The Intelligent Cloud segment, driven by Azure and cloud services, grew by +18% and accounted for approximately 40% of total revenue.
- Other segments, Productivity and Business Processes (32% of total revenue) and More Personal Computing (27% of total revenue) saw +7% higher and -19% lower growth, respectively.
- Earnings per share slid to $2.20, down from $2.48 in the previous year, partly due to unfavorable foreign exchange impacts.
- Microsoft announced plans to lay off around 10,000 employees by the end of March 2023, representing approximately 5% of its workforce.
- The company’s expansion plans include the proposed acquisition of video game maker Activision, although a lawsuit filed by the Federal Trade Commission (FTC) challenges the $69 billion deal.
- Microsoft’s partnership with OpenAI, particularly ChatGPT, has the potential to disrupt search engines and will be integrated into Microsoft products, but the full effects may take time.
- Challenges such as slowing demand for personal computers and a weaker advertising market impact earnings.
The 3-to-5-year Operational and Financial Outlook:
- The 3-to-5-year outlook indicates strong continued growth in revenue and earnings.
- The company’s long-run outlook is optimistic, focusing on capitalizing on opportunities in areas like automation. The Quantum Solutions arm is expected to excel, capitalizing on the expanding quantum computing market.
Noteworthy Strategic Developments
- Microsoft is expanding its reach in Artificial Intelligence (AI) and making Meta’s AI language model, Llama2, available on Azure.
- The company’s US$68.7 billion acquisition of Activision was approved by regulators who had been concerned about the deal’s potential impact on cloud gaming competition.
FinViz Snapshot: https://finviz.com/screener.ashx?v=341&f=idx_dji&o=roi&t=MSFT
10-Year Historical Price Chart:
https://tvc-invdn-com.investing.com/data/tvc_a3fd53bc0c86a3085ac1fb86e19dd522.png
Point & Figure Chart: (from StockCharts.com)
https://stockcharts.com/freecharts/pnf.php?c=MSFT,PWTADANRNO[PA][D][F1!3!!!2!20]
