Wall Street Analysts Weigh In: Is Microsoft a Buy?

Investors often look to Wall Street analysts for guidance when deciding whether to buy, sell, or hold a stock. Media coverage of analysts from brokerage firms shifting their ratings can impact a stock’s price. But do these recommendations truly matter?

Before evaluating the reliability of brokerage recommendations and how to leverage them effectively, let’s examine what these analysts are saying about Microsoft (MSFT).

Microsoft has an average brokerage recommendation (ABR) of 1.18, on a scale of 1 to 5 (from Strong Buy to Strong Sell), derived from recommendations made by 45 brokerage firms. An ABR of 1.18 indicates a consensus close to Strong Buy.

Out of the 45 recommendations contributing to this ABR, 39 are categorized as Strong Buy and four as Buy. This means that Strong Buy and Buy recommendations account for 86.7% and 8.9% of all ratings, respectively.

Analyzing Brokerage Recommendations for MSFT

To find the latest price targets and stock forecasts for Microsoft, click here>>>

While the ABR suggests a buy for Microsoft, relying solely on this information for investment decisions may not be wise. Numerous studies indicate that brokerage recommendations seldom accurately help investors identify stocks with potential for significant price appreciation.

You might wonder why that is. Analysts often exhibit a positive bias in their ratings due to the vested interests of the brokerage firms they work for. Research indicates that for every “Strong Sell” recommendation, brokerage firms are likely to issue five “Strong Buy” ratings.

This disconnect suggests that analysts’ interests do not always align with retail investors, and their ratings may not reflect the true potential direction of a stock’s price. As such, utilizing this information as a means to validate your own research or to complement successful indicators could be more beneficial.

With a solid track record supported by external audits, our proprietary stock rating tool, the Zacks Rank, classifies stocks into five categories ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell). This tool is considered a reliable predictor of a stock’s near-term price performance. Therefore, confirming the Zacks Rank with the ABR could enhance your investment decisions.

Distinguishing ABR from Zacks Rank

Although both the Zacks Rank and ABR are scored on a scale of 1 to 5, they represent different metrics.

The ABR is calculated solely based on brokerage recommendations, often rendered in decimal form (like 1.28). Meanwhile, the Zacks Rank is a quantitative model designed to utilize earnings estimate revisions, displayed as whole numbers from 1 to 5.

Historically, brokers have tended to provide overly optimistic recommendations. Their bias can mislead investors as their ratings are frequently more favorable than their internal research would support. This tendency can obscure the stock’s true potential.

Conversely, the Zacks Rank relies on earnings estimate revisions, which have been shown to correlate strongly with short-term stock price movements.

Furthermore, the Zacks Rank is proportionately applied across all stocks for which brokerage analysts provide current-year earnings estimates, ensuring a balanced representation among its five ranks.

Another significant difference lies in the timeliness of the information. The ABR could be outdated as it does not always reflect recent developments. Conversely, brokerage analysts often update their earnings estimates in response to changing business conditions, allowing the Zacks Rank to respond quickly and accurately to trends in price movement.

Should You Consider Investing in MSFT?

According to the Zacks Consensus Estimate, Microsoft’s earnings projection for the current year remains steady at $13.08, unchanged over the past month.

This consistency in analysts’ forecasts may indicate that the stock is likely to perform in line with broader market trends in the near term.

The stability of the consensus estimate, combined with additional factors affecting earnings projections, has resulted in a Zacks Rank #3 (Hold) for Microsoft. You can view the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here>>>>

Given this context, it may be prudent to exercise caution regarding the Buy-equivalent ABR for Microsoft.

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This article originally published on Zacks Investment Research (zacks.com).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.