Microsoft Shares Beat Consensus in Q4: What’s Next?

Microsoft (NASDAQ: MSFT) stock is up about 12% YTD compared to the S&P 500’s 14% gain in the same period. Interestingly, Microsoft competitor Amazon (NASDAQ: AMZN) is up 20% YTD. Overall, at its current price of $423 per share, MSFT is trading 15% below its fair value of $498, Trefis estimates. Microsoft valuation.

Against the current financial backdrop, MSFT stock has seen an extremely strong 100% gain from $215 in early January 2021 to around $425 today, compared with around 45% for the S&P 500 over that roughly three-year period. However, MSFT stock’s rally has been far from steady. Stock returns were 52% in 2021, -28% in 2022, and 58% in 2023. By comparison, the S&P 500’s returns were 27% in 2021, -19% in 2022, and 24% in 2023 – suggesting that MSFT underperformed S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been tough for individual stocks in recent years; for other heavyweights in the information technology sector, including AAPL, NVDA and ORCL, and even megacap stars GOOG, TSLA and AMZN. In contrast, Trefis High Quality Portfolio, with its collection of 30 stocks, has outperformed the S&P 500 every year in the same period of time. Why? As a group, HQ Portfolio stocks have delivered better returns with less risk compared to the benchmark index; less of a rollercoaster ride, as seen in HQ Portfolio’s performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could MSFT face a similar situation as in 2022 and underperform the S&P in the next 12 months – or will there be a sharp increase?

The tech giant beat consensus estimates for the fourth quarter of fiscal 2024 (fiscal year July-June). Total revenue came in at $64.73 billion, up 15% year-over-year, driven by 11% growth in its productivity and business processes unit, 19% growth in its intelligent cloud business, and 14% growth in its more personal computing business. While productivity and business processes benefited from growth in its Office 365, LinkedIn, and dynamic products commercial categories, its intelligent cloud business grew on the back of a 29% increase in Azure and other cloud services revenue. Notably, the improvement in Azure and other cloud services revenue still fell short of street estimates. Overall, net income rose 10% year-over-year to $22 billion.

The company’s revenue grew 16% YoY to $245.1 billion in fiscal year 2024. While all segments saw positive growth, intelligent cloud grew with Azure, productivity and business processes benefited from the commercial Office 365 suite, and more PC revenue came from gaming. Additionally, operating income grew 24% YoY over the year, leading to a 22% improvement in net income to $88.13 billion.

Going forward, we expect the same trend to continue in the first quarter. Overall, Microsoft revenues is estimated to be $280 billion in fiscal 2025. Additionally, MSFT’s net income margin is likely to remain flat from last year, leading to net income of $98.6 billion and full-year GAAP earnings per share of $13.28. Combined with a P/E multiple of just above 37x, this would lead to a valuation of $498.

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