Company Name: Microsoft Corporation
Entry Price: $251.50
Target Price: $300
Projected Yield: 19.20%
Time Line: 6 months
Position Size: 3%
Expected Dividend Yield: 0.90%
About Microsoft Corporation
Microsoft Corporation (MSFT.US) is one of the largest multinationals that provides various kinds of software for desktop, mobile, video game consoles, and other devices. It is mostly known for Windows, the world's widest spread OS family.
What's the Idea?
The idea includes capitalizing on a stock that may rise with more game-related and Azure earnings, as well as with AR and VR product development.
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Why Trade Microsoft Corporation?
Reason 1: Azure Gaining Momentum
Over the last few years, Microsoft is counting a lot upon cloud services. Microsoft Azure is its flagship here, which enables cloud app development and deployment, as well as storing data on remote data center servers. In 2019, Microsoft won a contract that includes delivering services to the Pentagon based on Azure cloud. This is quite an important move, as Microsoft beat Amazon with its AWS, who is currently leading in this niche.
AWS is still the largest cloud computing solution by market share, but Azure earnings are increasing faster every year. In Q3 FY2021, the earnings went up by 50% compared to 32% for AWS. This is mostly due to the competitive edge, including Microsoft 365 integration and the overall pricing policy.
Currently, over 95% of the Fortune 500 companies use Azure, which is good for the outlook. Larger Azure share means, in its turn, greater4 profits for Microsoft, as the cloud sales yield better ROI then the business in general. In Q3 2021, the Intelligent Cloud profit margin amounted to 40.50%. Azure margin has not been disclosed, but the report says it is growing rapidly.
The professional cloud service market amounted to $21.50B in 2020, Mordor Intelligence reports, while it should reach $57.50B by 2026, with an average rise of 17.70% per year. This proves Microsoft chose a very good niche, and Azure may well continue acting as a growth driver for the company and its margin in the midterm.
Reason 2: More Competitive Edge in Gaming Sector
With Microsoft Xbox Series X and Xbox Series S launched in late 2020, Microsoft earnings in the gaming sector got boosted by 9%. The company mostly counts on Xbox Game Pass, an online platform that kind of copies Netflix business model: for a monthly subscription fee, the users can download unlimited gaming content. Xbox Game Pass is rapidly gaining audience: by late April, it gained 23M new subscribers, which is 5M more compared to January 2021.
In the meantime, Microsoft is keeping its gaming content up to date and is constantly bring in some new additions, which, according to the management, should create a competitive edge over Sony. There is also a large team-based game section, which increases loyalty and adds new subscribers by engaging friends of every player; it increases the extent of retention, too.
Thanks to this strategy, Game Pass became the industry favorite, and its earnings increased in Q3 2021 by 34% compared to 2020. The gaming market has been increasing lately due to various factors, including the pandemic, and may continue its surge in the next few years.
Reason 3: Promising Experiments
Microsoft is currently investing large amounts into new segments that may become quite popular moving forward. This includes AR and VR products; in particular, Microsoft Mesh, an Azure based mixed reality platform that provides holographic experience through HoloLens 2 glasses. Mesh uses 3D capture for realistic human and object projection rendering against virtual environment. This may prove to be useful in business communication, design, and modeling.
AR and VR products by Microsoft are already being monetized: in March 2021, the company signed a 10-year contract with the Pentagon to supply 120,000 HoloLens 2 glasses at $21.88B.
AR and VR is just starting to gain momentum, while Microsoft is already positioning itself as a large player with a good market share.
Reason 4: Financial Performance
Microsoft has been posting stable financial results and good growth rates for long. In Q3 2021, its earnings rose by 19%, the operating profit margin reaching 41%. The net profit went up by 38%, at a 35.50% margin, while the diluted EPS amounted to $1.95.
The debt is at $70.10B against the cash of $125.40B. The cash flow reached $22.20b in Q3 2021, 27% higher than last year, mostly due to the cloud intelligence segment expansion. The free cash flow rose to $17.10B, with a 24% growth, YoY.
Despite the tech sector boom, Microsoft ratios are still fine, showing no overpricing:
- EV/S: 12.80x
- PE: 34.30x
- Forward PE: 30.10x
- P/FCF: 50.70x
In May, various investment institutions and banks raised their target price outlook for Microsoft as follows:
- Morgan Stanley: $300
- Credit Suisse Group: $300
- Raymond James: $290
- Rosenblatt Securities: $301
- Jefferies Financial Group: $290
- Wedbush: $310
How to Use the Idea
- Buy Microsoft Corporation stock at $251.50 per share.
- Allocate no more than 3% of your portfolio amount. To build a balanced portfolio, you can use the recommendations by our analysts.
- Sell the stock when the price reaches $300.
How to Buy Microsoft Corporation?
If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.
After opening an account, you can buy shares in either of the following ways:
Freedom24 Web Platform: In the Web Terminal section, type MSFT.US (Microsoft Corporation ticker in the NASDAQ) in the search box, and select Microsoft Corporation in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.
Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type MSFT.US (Microsoft Corporation ticker in the NASDAQ) and select Microsoft Corporation in the search results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.
Microsoft Corporation Shares >>
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