Tech giant Microsoft Corporation (MSFT) is facing a European Union (EU) probe in its proposed $69 billion deal to acquire gaming company Activision Blizzard, Inc. (ATVI). On the other hand, MSFT has accused the U.K. Competition and Markets Authority of relying on “self-serving” input from rival Sony Group Corp. (SONY) in its deliberations.
Moreover, the company reported mixed financials for its first fiscal quarter (ended September 30). While its total revenue increased 10.6% year-over-year to $50.12 billion, EPS declined 13.3% from the prior-year period to $2.35.
MSFT shares have declined 2.3% over the past month to close its last trading session at $228.87, trading just 7.2% above its 52-week low of $213.43. However, the stock is up 4% over the past five days.
Here are the factors that could influence MSFT’s performance in the near term:
High Profitability
MSFT’s trailing-12-month EBIT margin and net income margin of 41.69% and 34.37% are 477.1% and 789% higher than their respective industry averages of 7.22% and 3.87%. The stock’s trailing-12-month ROE, ROTC, and ROTA of 42.88%, 21.97%, and 19.40% are 559.1%, 491.1%, and 796% higher than their respective industry averages of 6.51%, 3.72%, and 2.16%.
Strong Growth Story
MSFT’s revenue has grown at a 16.1% CAGR over the past three years and a 15.4% CAGR over the past five years. Its EBIT and net income have grown at 22.8% and 19.3% CAGRs over the past three years. Its EPS has increased at a 20.6% CAGR over the same period.
Favorable Analyst Expectations
Analysts expect MSFT’s EPS to improve 3.7% year-over-year to $9.55 for the fiscal year ending 2023, while Street revenue estimate of $212.47 billion for the same year indicates a rise of 7.2% from the prior year. In addition, MSFT has beaten consensus EPS estimates in three out of the trailing four quarters. Its EPS is expected to grow 13% per annum over the next five years.
Attractive Dividend
MSFT announced a six-cent or a 10% sequential increase in its quarterly dividend to $0.68 per share in September. The increased dividend is payable to shareholders on December 8, 2022. This reflects the company’s ability to reward shareholders based on its strong cash position.
Its annual dividend of $2.72 yields 1.19% on the current price. The company’s dividend payouts increased at a 10.5% CAGR over the past three years and a 9.7% CAGR over the past five years. MSFT’s dividend payouts grew for 17 consecutive years.
POWR Ratings Reflect Promising Prospects
MSFT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. MSFT has a B grade for Quality, consistent with impressive profitability.
It has a Stability grade of B, in sync with its five-year beta of 0.92.
In the 53-stock Software – Business industry, it is ranked #9.
Click here to see the additional POWR Ratings for MSFT (Growth, Value, Momentum, and Sentiment).
View all the top stocks in the Software – Business industry here.
Bottom Line
MSFT’s reliable and growing dividend makes the stock a source of passive income amid the current uncertain times. Also, the company’s solid profitability and growth attributes should help the stock rebound quickly. Therefore, this big tech stock could be a solid buy despite the short-term headwinds.
How Does Microsoft Corporation (MSFT) Stack up Against Its Peers?
While MSFT has an overall POWR Rating of B, one might consider looking at its industry peer, VMware, Inc. (VMW), which has an overall A (Strong Buy) rating.
MSFT shares fell $1.98 (-0.87%) in premarket trading Wednesday. Year-to-date, MSFT has declined -31.50%, versus a -18.64% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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