Microsoft | Fundamental Analysis | Must Read...Microsoft's stock price reached an all-time high after the tech behemoth published its first-quarter earnings report last Tuesday. The company's revenue increased 22% year-over-year to $45.3 billion, beating analysts' forecasts by $1.3 billion. Adjusted earnings surged 25% to $2.27 per share, $0.19 above expectations.
For the second quarter, Microsoft management expects revenue growth of 16% to 18% year-over-year, which also beat analysts' expectations of 14%.
Microsoft's performance is majestic, but some investors may not crave to buy its stock after its price has already risen almost 50% in 2021. Let's look at a few reasons to buy Microsoft stock, as well as one argument for selling it, to see if it is still an attractive investment at these prices.
First and foremost, of course, is the growth of Microsoft Cloud Computing.
Microsoft's dramatic growth over the past seven years has been booste by the expansion of its cloud services, particularly Azure, Office 365, Dynamics, LinkedIn, and other cloud software. The business records the performance of these businesses together as "Microsoft Cloud."
In the first quarter, Microsoft Cloud's revenue grew 36% year over year to $20.7 billion, matching the 36% growth rate in the fourth quarter.
Revenue from Azure, the most thoroughly supervised segment of Microsoft Cloud, grew 48% on a constant currency basis. That represents an acceleration from Azure's 45% growth on a constant currency basis in the fourth quarter and should allay fears of a possible slowdown.
Azure's share of the global cloud infrastructure market also grew from 19% to 21% between the third quarters of 2020 and 2021, according to Canalys. That puts it in second place behind Amazon Web Services (AWS), whose year-over-year market share was unchanged at 32%.
Microsoft probably could not have achieved this growth without Satya Nadella, who took over as third CEO in 2014 and aggressively expanded these services with his mantra "mobile first, cloud first."
Second, we should not forget the recovery of favorable trends.
Over the past few years, Microsoft has become a fast-growth company again, but it continues to return tens of billions of dollars to its investors.
During the pandemic, several Microsoft enterprise services, including Office 365 Commercial, Dynamics 365, and LinkedIn Marketing Solutions, were disrupted as businesses closed.
However, as businesses resumed operations, those factors eased. In the first quarter, Office 365 and Dynamics 365 provided an acceleration in growth on a constant currency basis, and LinkedIn Marketing continued to grow.
The growth of these "resurgent" segments, along with the continued growth of Azure and other cloud services, is offsetting the slowdown in Microsoft's Surface and Xbox units, which suffered from chip shortages and other supply chains constraints in the first quarter.
Finally, it's returning a lot of cash to shareholders.
In the fiscal year 2021, Microsoft spent more than $39 billion on dividends and stock buybacks, accounting for about 70% of free cash flow (FCF). The company will spend another $10.9 billion, or 58% of FCF, on both activities in the first quarter of 2022.
Microsoft's forward dividend yield of 0.8% won't drag serious investors, but the company has reduced its stock by nearly 10% over the past seven years, offsetting the dilution from stock-based compensation plans.
Still, there is one single reason to sell Microsoft: its valuation.
Today Microsoft is worth $2.4 trillion, about eight times its market value of $300 billion when Satya Nadella became its CEO.
The company's stock currently trades at 13 times this year's sales forecast and 35 times its earnings forecast. Those estimates are slightly overstated compared to analysts' expectations for sales growth of 14% and earnings growth of 9% this year.
Massive market capitalization and high valuations could make it tough for Microsoft to repeat its multiple growth over the past seven years.
Microsoft stock is priced very high, but bears have been sounding the alarm about th is for years while the company's stock has been soaring. Still, most would agree that Microsoft deserves such a high valuation because it is still a perfect long-term investment that will continue to profit from the expanding cloud services market.
