Microsoft Corporation (MSFT)

Equity
US
Technology

RISK

RETURN

Key risk factors

Negligible price volatility

Strong & resilient to price shocks

Low default risk

Key return factors

Very strong margins and returns

Greatly overvalued vs peers

Good growth

Company profileMicrosoft Corporation develops, licenses, and supports software, services, devices, and solutions worldwide. The company operates in three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. The Productivity and Business Processes segment offers Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, Microsoft Viva, and Skype for Business; Skype, Outlook.com, OneDrive, and LinkedIn; and Dynamics 365, a set of cloud-based and on-premises business solutions for organizations and enterprise divisions. The Intelligent Cloud segment licenses SQL, Windows Servers, Visual Studio, System Center, and related Client Access Licenses; GitHub that provides a collaboration platform and code hosting service for developers; Nuance provides healthcare and enterprise AI solutions; and Azure, a cloud platform. It also offers enterprise support, Microsoft consulting, and nuance professional services to assist customers in developing, deploying, and managing Microsoft server and desktop solutions; and training and certification on Microsoft products. The More Personal Computing segment provides Windows original equipment manufacturer (OEM) licensing and other non-volume licensing of the Windows operating system; Windows Commercial, such as volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; and Windows Internet of Things. It also offers Surface, PC accessories, PCs, tablets, gaming and entertainment consoles, and other devices; Gaming, including Xbox hardware, and Xbox content and services; video games and third-party video game royalties; and Search, including Bing and Microsoft advertising. The company sells its products through OEMs, distributors, and resellers; and directly through digital marketplaces, online stores, and retail stores. Microsoft Corporation was founded in 1975 and is headquartered in Redmond, Washington.

Valuation: Greatly overvalued

Multiple

TTM

NTM

P/E

37.10

36.40

PEG

2.70

P/B

12.60

9.40

P/S

13.50

13.10

P/FCF

45.30

35.70

EV/EBITDA

25.70

29.60

Considering past and projected metrics, the stock is distinctly 'expensive' compared to its peers. Specifically, the stock is expensive' on P/E, overvalued on EV/EBITDA, and overpriced on P/FCF.

Performance: Mixed

Over the past six months, the stock has consistently climbed, resulting in 15% total increase. When compared to its international counterparts in the same sector and industry (as shown above), the stock has exceeded their performances, leading by 9ppts in total. This is equally valid for peers from the same country and industry. Given the stock's valuation versus its peers, its total price movement is neither favourable nor unfavourable.

Analyst view: Somewhat favourable

The average target price is 440 and suggests 2% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 550.0. This translates into 28% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 298.1. This is equivalent to 31% downside potential in the worst case.

Profitability: Very strong

RoE

Microsoft Corporation reported a return on equity (RoE) of 35.1% in the last 12 months, down from 39.3% in FY22. The market consensus projects an RoE of 35.8% in FY24, again ahead of its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 18.1% in the last 12 months, a decrease from 19.1% in FY22. The market analysts predict that RoA will be 18.9% in FY24, again stronger than its peers.

RoCE

In the last 12 months, the return on capital employed (RoCE) declined to 24.1%, above the peers. The consensus estimate for FY24 for RoCE is 31.9%, again ahead of the peers.

Net margin

EBITDA margin

Historically, MSFT has reported very strong net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 36.4%, a growth from 33.0% in FY22. The company has reported very strong EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 54.1% in the last 12 months, up from 48.0% in FY22.

RoIC / WACC = 4.1(excellent value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 4.1 in the past several years. This ratio implies a excellent shareholder value creation.

Growth: Good

Revenue

EBITDA

EPS

Free cash flow

MSFT reported revenue of USD 236 584mn in the last 12 months, up 4% from FY23. At the same time, the dynamics of cash flow, as measured by free cash flow (FCF), were drastically different. EPS grew 4% from FY23 to USD 11.59. Market expects EPS to reach USD 11.79 in FY24.Revenue growth has been moderate in the past several years (positive-to-neutral), while EBITDA growth has been steady. This all contributed to continued EPS growth (positive-to-neutral). The FCF trend is in line with EBITDA. On the positive side, revenue and FCF dynamics is very stable.

Dividends: Decent

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, and there is an evident trend. In the past 12 months, the dividend yield has been low and below its peers. On average, the company pays dividends quarterly, which may appeal to investors valuing a regular income stream.

Default risk: Low

The risk of default is low. We note robust profitability, solid return on capital, strong debt servicing capacity, adequate interest coverage, solid cash flow generation, and an favourable capital structure, among the positive credit factors. Among the negative credit factors, we point to excessive margin volatility.

Volatility: Negligible

In normal market circumstances, MSFT is not volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to negligible.

Stress-test: Negligible

In highly turbulent market conditions, MSFT is not volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low.

Selling difficulty: Low

MSFT boasts high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and remains mildly favourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.