Microsoft Stock Rallies on Strong Earnings and Outlook

Wednesday, April 27, 2022
author picture Raphael Thomas
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Original content created by news.limited staff

Microsoft Stock Rallies on Strong Earnings and Outlook

The latest financial report from Microsoft shows the software giant generating robust revenue growth and a positive outlook for the future. That's good news for investors. It also bodes well for the stock's price-to-sales ratio‚ which is growing faster than the industry average. The current price-to-sales multiple stands at 10.7‚ up from 4.4 in 2016 and higher than the average of 6.6 over the past five years. Microsoft stocks last traded above ten during the early 2000s.

Wall Street rallies on strong earnings and outlook

The S & P 500 rose on Friday as the company reported strong earnings and a better outlook for the year. The rally came after September saw investors worry about rising prices‚ slowing growth and supply chain logjams. These concerns led to a 4.8 percent decline in the benchmark index in September. Microsoft's stock was one of the few stocks to rise on Thursday's news. And with a strong outlook for the next year‚ Microsoft is poised to continue its upswing. The stock began the day lower but quickly bounced back and finished the day in the positive territory. The company's cloud business has become a driving force in its growth‚ and with a large runway remaining‚ it's not too late to buy shares in the tech giant. But while the company still faces plenty of competitive challenges‚ Microsoft stock is an excellent bet for investors. If you are new to Microsoft‚ here's what you should know about this company. After a sharp drop in April‚ Microsoft shares have steadily rallied since then. They've made higher highs and lower lows‚ but have yet to test trendline support. The company's recent acquisition of Activision Blizzard shows that it's not afraid to spend big to keep its momentum moving. In the meantime‚ you can buy a Microsoft stock at a deep discount if you want to take advantage of the upcoming earnings announcement. In addition to Microsoft's quarterly earnings report‚ the company's recent earnings outlook has been one of the most reliable metrics for measuring the company's performance. Current consensus earnings expectations for Microsoft and recent changes in those expectations show a strong correlation between near-term stock movements and revisions to those estimates. The company's Zacks Rank is another reliable tool. If Microsoft's earnings outlook is on track‚ Microsoft stock could move even higher.

Analyst estimates for the corporate earnings season have grown less optimistic

A fresh earnings report from Microsoft has raised the company's shares to new record highs‚ putting it in a bullish trend. Although the stock has underperformed the market in the first half of the year‚ its recent earnings outlook is a reliable indicator of future stock performance. Earnings estimate revisions‚ which reflect current consensus expectations‚ tend to be correlated with near-term stock price movements. The stock's Zacks Rank is a well-known‚ quantitative tool that helps investors assess Microsoft's long-term prospects. The recent report shows that Microsoft has beaten expectations by a large margin. The company is expecting to post revenue growth of 19.7% in its fiscal fourth quarter. It also expects its total revenue to grow 13.1% to $43.0 billion. However‚ the company's current price to sales ratio remains high‚ at 31.9 times fiscal 2022 earnings estimates of $8.09 per share. This is above the historical average of 6.6 over the last five years. Microsoft last reached a price-to-sales multiple over 30 in early 2000. The company's earnings report surpassed expectations and offered solid guidance for the rest of the year. Microsoft's cloud computing business continues to enjoy a favorable outlook‚ with its overall revenue growth reaching 19.7% last year. Its Dynamics business is growing at a rapid rate and is expected to shift to a subscription-based model. Microsoft's stock has also outperformed the Computer-Software industry and the benchmark index. The stock's recent rally is likely the result of rising volatility on the Nasdaq. The recent surge was almost double the expansion of the NASDAQ 100 Index in 2021. During the summer‚ Microsoft hit a $2 trillion market cap‚ becoming only the second publicly-traded company to reach that level. Microsoft's cloud-computing business is the primary driver of this rally‚ and the company's CEO Satya Nadella has been focusing on the cloud computing space.

Microsoft's revenue beat expectations

On Tuesday‚ Microsoft's quarterly earnings beat analysts' estimates‚ thanks to a big jump in the company's cloud business. Revenue rose 18% year over year and profits grew 8%. The company's revenue surpassed expectations by nearly $2 billion‚ with its cloud and Office divisions contributing the largest percentage of revenue growth. Analysts were expecting the company to earn $2.30 per share‚ while its cloud revenues increased by 32%. After the earnings report‚ Wall Street will focus on how much of the company's cloud and corporate software revenue came from those businesses. Analysts have cut their profit targets for the past three months‚ worried about Steve Ballmer's ambitious reorganization plans and the pricey Nokia acquisition. Still‚ the stock has rallied a bit after Microsoft's strong quarterly results. In addition to boosting the bottom line‚ investors will be looking at the company's guidance for the next quarter. In addition to cloud and Office revenue‚ Microsoft announced plans to acquire video-game company Activision Blizzard for $68 billion. The deal will be Microsoft's largest in the past 47 years. Microsoft also closed the purchase of Nuance Communications‚ which focuses on the health care industry. Nuance deducted a penny from the company's Q2 earnings‚ but added $111 million to its bottom line. Microsoft's stock is down 19% since the start of 2022‚ and the company's stock has underperformed the S & P 500 index. Revenue from cloud services and Windows software to PC makers grew at a double-digit clip in the first quarter. The company's cloud services continue to grow despite the ongoing COVID-19 pandemic‚ which has impacted traditional PC stalwarts. Microsoft's revenue beat analyst expectations by a margin of 50 cents per share. Microsoft also beat the Wall Street consensus on earnings per share (EPS) of 54 cents a share.

Its Azure revenue growth was in line with expectations

Microsoft's Azure‚ a cloud computing service‚ posted a solid quarter‚ but its revenue growth slowed to its slowest pace in several years. The company doesn't break out revenue from Azure‚ but the growth rate in the first quarter was 76%‚ down from an annual rate of 89% in the previous quarter. Analysts are optimistic that Azure will continue to be a key part of Microsoft's business. Azure revenue growth slowed from five-year highs last quarter to $46% this quarter‚ although that was in line with Wall Street estimates. While some investors had hoped for better growth from Azure‚ Microsoft CFO Amy Hood projected higher growth in the current quarter. Her projection turned bearish after hours bears into bulls. While Azure revenue growth will likely slow down in the near future‚ the overall trend toward cloud computing remains strong. Alphabet's GCP and Microsoft's Azure remain the top cloud computing options‚ so Azure's growth will continue to be a big part of that story. Cloud services revenue grew 28% and Office revenue grew 14% year over year‚ despite concerns about competition. Revenues from XBox content and services declined 4% year over year‚ with the underlying reasons being declining XBox usership‚ chip shortages‚ and supply chain disruptions. Despite the mixed results‚ Microsoft Azure revenue growth was in line with expectations. The company also reported a third-quarter cloud revenue of $11.3 billion‚ up 14% from the prior-year quarter. While revenue from Azure was flat in constant currency‚ commercial bookings grew 30% in the third quarter. Azure and other cloud services contributed to $3 billion in revenue‚ which was up from $2.66 billion the prior year. The growth in Azure was also supported by improvements in its Enterprise Services business. Microsoft's operating income increased by $2.4 billion‚ compared to analyst expectations of three percent growth. These figures were in line with expectations.

Its price-to-sales ratio is 2.67

Microsoft's price-to-sales (P/S) ratio is a popular metric used by investors to gauge the company's value relative to the performance of its direct and indirect competitors. The lower the ratio‚ the better‚ since a higher P/S indicates that the company is undervalued. However‚ Microsoft's P/S may not be representative of the company's actual value. To find out more‚ read this article.