Is Microsoft a Buy Going Into its Q1 Earnings Report?

Renowned tech giant Microsoft Corporation (MSFT) is the second-largest company globally in terms of market capitalization. It briefly surpassed Apple, Inc. (AAPL) to become the biggest company globally last October. MSFT is ranked #15 on the Fortune 500 list and is the third most admired company globally.

MSFT is scheduled to release its fiscal 2022 second quarter (ended December 2021) results on Jan. 25, 2022. 

Analysts expect MSFT’s revenues to increase 17.9% year-over-year to $50.78 billion in the about-to-be-reported quarter. In addition, the $2.32 consensus EPS estimate for the last quarter indicates a 14.2% improvement from the same period last year.

Here is what could shape MSFT’s performance in the near term:

Activision Acquisition

MSFT announced its plans to acquire gaming giant Activision Blizzard (ATVI) on January 18. Deemed the biggest tech deal in history, MSFT plans to buy ATVI for $95 per share in an all-cash transaction totaling $68.70 billion. Following the acquisition, MSFT is expected to become the third-largest gaming company by revenue, after Sony and Chinese conglomerate Tencent. The deal is expected to close next year.

The acquisition marks MSFT’s entry into the metaverse race. The gaming platform is expected to play an essential role in the development of virtual and augmented reality platforms. In addition, MSFT’s Game Pass portfolio is expected to grow substantially through this merger. Game Pass is expected to gain direct access to ATVI’s 400 million monthly active player base and three billion-dollar franchises in 190 countries, making it the most compelling and diverse lineup of gaming content.

Higher-Than-Industry Profit Margins

MSFT’s 68.86% trailing-12-month gross profit margin is 38.9% higher than the 49.57% industry average. Its trailing-12-month EBITDA and net income margins of 42.14% and 38.51%, respectively, compare with 14.42% and 6346% industry averages. In addition, the company’s 28.27% levered free cash flow margin is 139.9% higher than the 11.78% industry average.

Also, MSFT’s 49.3%, 20.24%, and 21.22% respective ROE, ROA, and ROTC are significantly higher than the 8.33%, 3.62%, and 4.97% industry averages.

Consensus Rating and Price Target Indicate Potential Upside

Of the 28 Wall Street analysts that rated MSFT, 27 rated it Buy while one rated it Sell. The 12-month median price target of $375.12 indicates a 23.7% potential upside from yesterday’s closing price of $303.33. The price targets range from a low of $320.00 to a high of $425.00.

POWR Ratings Reflect Rosy Prospects

MSFT has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a B grade for Stability, Sentiment, and Quality. Its relatively low 0.86 beta is in sync with the Stability grade. In addition, the bullish earnings and revenue growth outlook for MSFT justifies the Sentiment grade. And the company’s higher-than-industry profit margins are in sync with the Quality grade.

Of  166 stocks in the Software – Application industry, MSFT is ranked #16.

In addition to the grades I have highlighted above, view MSFT Ratings for Growth, Value, and Momentum here.

Bottom Line

MSFT is poised to garner significant market share in the gaming industry through its  Activision merger, placing it at the forefront of the metaverse race. In addition, the acquisition is expected to bolster MSFT’s growth trajectory in the near term as it establishes itself as a tech and gaming giant.

The company has an impressive earnings surprise history also; it surpassed the consensus EPS estimates in each of the trailing four quarters. MSFT is poised to meet the consensus estimates in the about-to-be-reported quarter because the demand for software and cloud computing remained high amid the continuing remote working environment. Thus, we think MSFT is an ideal investment bet now.

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

While MSFT has a B rating in our proprietary rating system, one might want to consider looking at its industry peers, Open Text Corporation (OTEX), Progress Software Corporation (PRGS), and eGain Corporation (EGAN), which have an A (Strong Buy) rating.

MSFT shares were trading at $310.63 per share on Thursday morning, up $7.30 (+2.41%). Year-to-date, MSFT has declined -7.64%, versus a -3.63% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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