Strong Outlook for Microsoft Stock Post Q2 Earnings

Microsoft (NASDAQ: MSFT) is set to announce its fiscal Q2 2024 results on Tuesday, January 30, 2024. Analysts predict that the company will outperform market expectations for both revenues and earnings. In the last quarter, net revenues surged 13% year-over-year to $56.5 billion, driven by a 13% rise in the productivity & business processes unit and a 19% growth in the intelligent cloud segment. Furthermore, the company achieved a favorable decrease in total expenses as a percentage of revenues. This positive trend is expected to continue into the upcoming results. Our in-depth analysis on Microsoft’s Earnings Preview further details this forecast. 

Over the last three years, Microsoft stock has experienced significant volatility, currently trading at around $390, marking a 63% increase since the beginning of 2023. This performance outshines the S&P 500, which saw a mere 25% increase over the same period. Notably, Microsoft underperformed the S&P 500 in 2022, a challenging year for individual stocks, including other significant players in the Information Technology sector. In contrast, the Trefis High Quality (HQ) Portfolio, comprising 30 stocks, has consistently outperformed the S&P 500 each year, promising better returns with less risk. Given the current macroeconomic uncertainties, including high oil prices and elevated interest rates, the question arises if Microsoft will face a similar situation as in 2022 and underperform the S&P 500 or witness a strong upward surge.

Our forecast estimates Microsoft’s valuation at $409 per share, representing a 5% premium over the current market price. 

(1) Revenues expected to beat the consensus 

In the last quarter, operating expenses as a percentage of revenues decreased, leading to a 27% year-over-year improvement in net income to $22.3 billion.

Microsoft’s revenues grew 7% year-over-year to $211.9 billion in FY 2023. Additionally, the company exhibited revenue growth in the first quarter of FY2024. 

• The productivity & business processes revenues increased by 9% in FY2023, driven by higher Office 365 commercial revenues. This trend is expected to continue in Q2.
• The intelligent cloud revenues rose by 17% in FY2023, with the momentum continuing into Q1. A similar performance is anticipated in the upcoming quarter.
• The More personal computing revenues witnessed an 8% year-over-year decline in FY2023, primarily due to lower Windows and Xbox revenues. However, the segment reported marginal growth in the first quarter, and improvements are expected in Q2.
• Overall, our projection indicates that Microsoft’s revenues will reach $240.7 billion for FY2024.

Trefis estimates Microsoft’s fiscal Q2 2024 net revenues to be around $61.74 billion, slightly above the consensus estimate of $61.13 billion. 

(2) EPS to edge past the consensus estimates

The company is expected to report an adjusted earnings per share (EPS) of $2.82 for Microsoft Q2 2024, slightly exceeding the consensus estimate of $2.78. Despite a 1% year-over-year decline in net income to $72.4 billion in FY2023, the first quarter saw a significant improvement, with net income increasing by 275% year-over-year to $22.3 billion. The upward trajectory is expected to continue in the second quarter, leading to an anticipated annual GAAP EPS of $11.28 for FY 2024. 

(3) Stock price estimate is at par with the current market price

Considering a GAAP EPS estimate of around $11.28 and a P/E multiple of just above 36x in fiscal 2024, our valuation places Microsoft’s stock price at $409, representing a 5% premium over the current market price. 

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year