Understanding Microsoft’s Stock Performance: Key Factors to Watch

Microsoft (MSFT) has recently gained attention as one of the most searched stocks on Zacks.com. This prompts a look at important factors that could affect the stock’s future performance.

In the past month, shares of this software giant have shown a return of 0%, while the Zacks S&P 500 composite saw a decline of 3.6%. Additionally, the Zacks Computer – Software industry experienced a 0.5% loss during the same period. Given this information, many investors are curious: What does the future hold for the stock?

Although news reports or rumors can trigger immediate stock price movements, fundamental factors ultimately drive long-term buy-and-hold decisions. Understanding these elements will give clearer insights into Microsoft’s prospects.

Revisions in Earnings Estimates

At Zacks, we prioritize the changes in company earnings projections. We believe that the fair value of a stock correlates with the present value of its anticipated earnings.

We analyze how sell-side analysts are adjusting their earnings estimates in response to the latest business trends. An uptick in earnings estimates typically increases the fair value of a stock, attracting investor interest and driving prices higher. Empirical data has demonstrated a strong link between earnings estimate revisions and short-term stock price changes.

For the current quarter, Microsoft is projected to report earnings of $3.20 per share, an increase of 8.8% compared to the previous year. The Zacks Consensus Estimate has slipped by 0.9% over the last month.

The consensus earnings estimate for the current fiscal year stands at $13.04, indicating a year-over-year rise of 10.5%. This projection has adjusted downward by 0.3% within the last 30 days.

Looking ahead, the consensus earnings estimate for the next fiscal year is $14.64, depicting a growth of 12.3% compared to last year. This forecast has also decreased by 0.4% recently.

Our proprietary stock rating tool, the Zacks Rank, provides a clearer view of a stock’s short-term price direction by incorporating earnings estimate revisions. Currently, due to the significant changes in consensus estimates and three related earnings factors, Microsoft is rated Zacks Rank #3 (Hold).

Below is a chart illustrating the evolution of the company’s forward 12-month consensus EPS estimate:

12-Month EPS

Projected Revenue Growth

While earnings growth is a key indicator of a company’s financial situation, a business must also generate increasing revenues to sustain that growth. Continued earnings expansion is difficult without corresponding revenue growth.

For Microsoft, the consensus sales estimate of $68.36 billion for the current quarter suggests an annual increase of 10.5%. Future estimates indicate revenues of $275.39 billion and $311.32 billion for the current and next fiscal years, representing growth rates of 12.4% and 13.1%, respectively.

Recent Results and Surprise Analysis

In the last reported quarter, Microsoft generated revenues of $69.63 billion, reflecting a year-over-year growth of 12.3%. The EPS of $3.23 showed an increase from $2.93 in the prior year.

The reported revenues exceeded the Zacks Consensus Estimate of $68.7 billion, showcasing a positive surprise of 1.35%. The EPS also surpassed expectations by 3.86%.

Over the trailing four quarters, Microsoft has consistently outperformed consensus EPS estimates and beaten revenue expectations each time.

Valuation Metrics

Understanding a stock’s valuation is vital for effective investment decision-making. It is important to assess whether a stock’s price accurately reflects the intrinsic value of the business and its outlook for growth.

Comparing a company’s valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), to its historical values reveals whether the stock is fairly priced, overvalued, or undervalued. Additionally, comparing these metrics with industry peers provides context for assessing the stock’s price.

Utilizing the Zacks Style Scores system, we find that Microsoft has received a D grade in the Zacks Value Style Score, indicating that it is trading at a premium relative to its competitors. Click here to view the specific valuation metrics contributing to this rating.

Conclusion

The factors discussed here along with additional insights from Zacks.com might help investors gauge whether the current market buzz around Microsoft is justified. However, the Zacks Rank #3 implies its performance may align with broader market trends in the near term.

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Microsoft Corporation (MSFT): Free stock analysis report.

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.