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1 Stock That Continues to Outperform the S&P 500

Software giant Microsoft (MSFT) reported robust fourth-quarter financials. The company is well-positioned to capitalize on the continued transition of businesses to cloud platforms. The tech stock has outperformed the S&P 500 over the past five years. And in addition to market-beating price returns, MSFT has raised its dividend for 17 consecutive years. So, this stock is an excellent option for investors looking for a steady income and long-term capital appreciation. Read on…

Microsoft Corporation (MSFT) operates through three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. The tech giant’s revenue increased 12% year-over-year in the fiscal 2022 fourth quarter ended June 30. The gains were primarily driven by solid Azure cloud infrastructure platform growth.

“In a dynamic environment, we saw strong demand, took a share, and increased customer commitment to our cloud platform. Commercial bookings grew 25%, and Microsoft Cloud revenue was $25 billion, up 28% year-over-year. As we begin a new fiscal year, we remain committed to balancing operational discipline with continued investments in key strategic areas to drive future growth,” said Amy Hood, executive vice president, and chief financial officer of MSFT.

On July 20, MSFT and Oracle Corporation (ORCL) extended their collaboration to simplify the multi-cloud experience with Oracle Database Service for Microsoft Azure. With this new offering, Microsoft Azure customers could quickly provision, access, and monitor enterprise-grade Oracle Database services in Oracle Cloud Infrastructure (OCI) with a familiar experience.

Also, on June 16, MSFT announced Microsoft Viva Sales, a new seller experience application. Viva Sales works with any seller’s CRM to automate data entry and brings AI-powered intelligence to sellers in Microsoft 365 and Microsoft Teams. This would allow sellers to personalize their customer engagements more seamlessly toward faster deal closure. This new offering might boost the company’s revenue streams.

Furthermore, MSFT has returned $12.40 billion to shareholders in the form of share repurchases and dividends in the fourth quarter of the fiscal year 2022, a rise of 19% compared to the fourth quarter of 2021.

MSFT pays $2.48 as dividends annually, which yields 0.94% at the current price. This compares to its 4-year average dividend yield of 1.09%. Its dividends have increased at a CAGR of 10.5% over the past three years and 9.7% over the past five years. The company has increased its dividend for 17 consecutive years.

The stock has declined 5.6% over the past month to close the last trading session at $262.97. However, Wall Street analysts expect the stock to hit $325.77 in the near term, representing a 23.9% upside potential.

MSFT has outperformed the S&P 500 over the past five years. The stock’s 255.3% returns over the past five years compare to the SPDR S&P 500 Trust ETF’s (SPY) 61.9% gains.

Here is what could influence MSFT’s performance in the upcoming months:

Robust Financials

MSFT's revenue increased 12.4% year-over-year to $51.87 billion, and its gross margin grew 10.2% from the year-ago value to $35.44 billion in the fiscal 2022 fourth quarter ended June 30, 2022. The company's operating income amounted to $20.53 billion, up 7.5% year-over-year. Its net cash from operations rose 8.5% year-over-year to $24.63 billion.

Furthermore, the company's net income and earnings per share came in at $16.74 billion and $2.23, registering increases of 1.7% and 2.8% from the prior-year period, respectively.

Favorable Analyst Estimates

Analysts expect MSFT's revenue for the fiscal 2023 first quarter (ending September 2022) to come in at $49.89 billion, representing a rise of 10.1% from the same period in 2021. The $2.32 consensus EPS estimate for the ongoing quarter indicates a 2.2% year-over-year increase. The company has surpassed the consensus revenue and EPS estimates in three of the trailing four quarters, which is impressive.

The company’s revenue and EPS for the current year (ending June 2023) are expected to grow 11.1% and 10.8% year-over-year, respectively. Also, Street expects the company's revenue and EPS to grow 14.2% and 17.3% year-over-year, respectively.

High Profitability

MSFT's trailing-12-month gross profit margin of 68.40% is 35.9% higher than the 50.33% industry average. Its trailing-12-month EBITDA margin of 49.42% is 278.2% higher than the 13.07% industry average. Likewise, the stock's trailing-12-month net income margin of 36.69% is 763.6% higher than the industry average of 4.25%.

Furthermore, MSFT’s levered FCF margin of 24.96% is 210.7% higher than the industry average of 8.03%. Its trailing-12-month ROCE, ROTA, and ROTC of 47.15%, 22.21%, and 19.94% are higher than the industry averages of 7.28%, 3.98%, and 2.75%, respectively.

POWR Ratings Show Promise

MSFT's overall B rating equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree. 

MSFT has a B grade for Quality, consistent with its higher-than-industry profitability multiples.

MSFT is ranked #10 out of 53 stocks in the Software-Business industry.

Beyond what I have stated above, we have also given MSFT grades for Sentiment, Growth, Value, and Momentum. Get access to all the MSFT ratings here.

Bottom Line

MSFT has achieved strong top and bottom-line growth in its last quarter. The company is well-positioned to ride the cloud computing industry’s growth. And is committed to driving robust growth in the coming year with continued partnerships and investments in key strategic areas. The software company expects revenue and operating income to increase at a double-digit pace in fiscal 2023.

Given MSFT’s strong financials, solid revenue and earnings growth estimates, high profitability, and attractive dividend, we think it could be wise to invest in the stock now.

How Does Microsoft Corporation (MSFT) Stack Up Against its Peers?

MSFT has an overall POWR Rating of B. One could also check out these other stocks within the Software-Business industry: VMware Inc. (VMW) with an A (Strong Buy) rating and Amdocs Ltd. (DOX) and Citrix Systems, Inc. (CTXS) with a B (Buy) rating.

MSFT shares were trading at $266.40 per share on Wednesday morning, up $3.43 (+1.30%). Year-to-date, MSFT has declined -20.27%, versus a -14.92% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.


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