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Microsoft Corporation (MSFT) Catches Investors’ Attention: Here’s What You Need to Know

Microsoft (MSFT) has been one of the most searched stocks on Zacks.com lately. So, you might want to consider some of the facts that could shape the stock’s performance in the short term.

Shares of this software maker have returned -2% over the past month compared to the -5.1% change in the Zacks S&P 500 composite. The industry Zacks Computer – Software, to which Microsoft belongs, lost 1 .6% over this period. Now the key question is: where could the stock be heading in the near term?

Although media reports or rumors of a material change in a company’s business outlook usually cause its stock to trend and result in an immediate price change, there are always certain fundamental factors that ultimately determine the buy and hold decision.

Revisions to earnings estimates

At Zacks, we prioritize evaluating change in a company’s future earnings projection over anything else. This is because we believe that the present value of its future income stream is what determines the fair value of its stock.

Our analysis is primarily based on how sell-side analysts covering the stock revise their earnings estimates to reflect the latest trading trends. When a company’s earnings estimates increase, the fair value of its stock also increases. And when the fair value of a stock is higher than its current market price, investors tend to buy the stock, causing its price to rise. For this reason, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term movements in stock prices.

For the current quarter, Microsoft is expected to post earnings of $2.30 per share, a variation of +1.3% compared to the quarter of the previous year. The Zacks consensus estimate has changed -1.4% over the past 30 days.

For the current year, the consensus earnings estimate of $9.99 indicates a change of +8.5% from the prior year. Over the last 30 days, this estimate has changed by -1%.

For the next fiscal year, the consensus earnings estimate of $11.51 indicates a change of +15.2% from what Microsoft was expected to report a year ago. Over the past month, the estimate has changed by -1.4%.

With an impressive externally audited balance sheet, our proprietary stock rating tool – the Zacks Ranking – is a more conclusive indicator of a stock’s short-term price performance because it effectively harnesses the power of earnings estimate revisions. The magnitude of the recent change in the consensus estimate, plus three more factors related to earnings estimatesresulted in a Zacks Rank #4 (Sell) for Microsoft.

The chart below shows the evolution of the company’s consensus 12-month EPS estimate:

12 month EPS

Expected revenue growth

Although earnings growth is arguably the most superior indicator of a company’s financial health, nothing as such happens if a company is unable to increase its revenue. After all, it is almost impossible for a company to increase its profits for an extended period of time without increasing its revenue. It is therefore important to know the potential revenue growth of a business.

In the case of Microsoft, the consensus sales estimate of $49.57 billion for the current quarter indicates a year-over-year change of +9.4%. Estimates of $218.02 billion and $247.57 billion for the current and next fiscal year indicate changes of +10% and +13.6%, respectively.

Latest reported results and history of surprises

Microsoft reported revenue of $51.87 billion in the last quarter, representing a year-over-year change of +12.4%. EPS of $2.23 for the same period versus $2.17 a year ago.

Compared to the Zacks consensus estimate of $52.31 billion, reported revenue is a surprise -0.86%. The EPS surprise was -2.19%.

In the past four quarters, Microsoft has exceeded consensus EPS estimates three times. The company has exceeded consensus revenue estimates three times during this period.

Evaluation

Without considering the valuation of a stock, no investment decision can be effective. Crucial to predicting a stock’s future price performance is whether its current price accurately reflects the intrinsic value of the underlying business and the company’s growth prospects.

While comparing the current values ​​of a company’s valuation multiples, such as the price-to-earnings (P/E) ratio, the price-to-sales (P/S) ratio, and the price-to-cash flow (P/CF) ratio , with its own historical values ​​help determine whether its stock is fairly valued, overvalued or undervalued, comparing the company against its peers on these metrics gives a good idea of ​​the reasonableness of the stock price .

The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to traditional and unconventional valuation metrics to rank stocks from A to F (an A is better than a B; a B is better than a C; and so on), is quite useful in determining whether a stock is overvalued, correctly priced, or temporarily undervalued.

Microsoft is rated D on this front, indicating that it is trading at a premium to its peers. Click here to see the values ​​of some of the rating metrics that led to this rating.

Conclusion

The facts discussed here and plenty of other information about Zacks.com might help determine whether or not it’s worth paying attention to the market buzz about Microsoft. However, its Zacks No. 4 ranking suggests it may underperform the broader market in the near term.

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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.