NEW YORK, NY – APRIL 30: The Microsoft Store is seen in New York City on April 30, 2020. The … [+]
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Michael Kramer and Mott Capital’s clients own MSFT
Microsoft Corp. (MSFT) reported solid quarterly results, with sales and earnings slightly exceeding analysts’ expectations. Despite the strong pace, the stock experienced a subdued reaction from investors, which traded almost unchanged after close of business. There are two reasons; First, the strong results appear to have already been incorporated into the stock price, with stocks trading at a peak earnings multiple. Second, the company issued forecasts for the second fiscal quarter that were slightly weaker than estimates.
Make no mistake; Results were much better than expected, with sales of roughly $ 37.2 billion and earnings of $ 1.82 per share. It was better than analysts’ estimates for $ 35.7 billion in revenue with $ 1.54 in profit, a massive upper and lower range gain. The strong results were driven by its smart cloud segment, which saw revenue jump nearly 20% to around $ 13 billion.
Despite these strong results, the stock trades at roughly 30x its annual estimate. This is the stock’s highest valuation since 2002, after the tech bubble’s implosion in the late 1990s. The high rating reflects that much of this good news has already been branded into the price.
Even looking at the company’s future growth, analysts predict earnings will grow 13.4% in FY 2022 and 15.6% in FY 2023. If you adjust the stock for future earnings growth, you will find that the PEG ratio is well above 2.
Microsoft Score and PE Ratio
It didn’t help that the company gave guidelines that fell short of expectations. Microsoft announced that it expects revenue of approximately $ 40 billion in the middle of the range for the second quarter of its fiscal year. That is below analysts’ consensus estimate of $ 40.4 billion.
Still, the stock has been trending higher for a while, and if the market starts rising, Microsoft will likely go along with it. Should the stock climb above $ 216, it could hit its previous highs at $ 231. However, a failure to break the resistance at $ 216 could mean the stock will have to drop further, possibly to around $ 198. The relative strength index trended lower, indicating that the stock has seen bullish momentum.
Microsoft technical diagram
Unfortunately, in an environment where valuations are stretched, it takes more than strong quarterly results to keep a stock moving. When this happens, investors may have to wait a bit and let the company grow into the valuation the market has given it.
Michael Kramer is a financial market strategist and portfolio manager of the Mott Capital Thematic Growth Portfolio.
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