As the demand for generative AI proliferates, software giant Microsoft (MSFT) has actively pursued innovation in this field, capturing headlines and raising investor interest. However, is the stock a strong buy this week? Read on to find out...

Tech behemoth Microsoft Corporation’s (MSFT) commitment to innovation, particularly in the realm of artificial intelligence (AI), has positioned it as a preferred choice for customers seeking cutting-edge solutions. The company’s dedication to AI adoption has not only resulted in significant expansion but also has garnered industry attention.

Hence, I think investors could strongly consider buying the stock this week. This article will explore key factors influencing MSFT’s potential as an investment opportunity.

MSFT has been actively entering into strategic partnerships to advance its offerings and maintain its competitive edge.

On June 29, 2023, MSFT and Moody’s Corporation (MCO) formed a strategic partnership to provide advanced data, analytics, research, collaboration, and risk solutions for the financial services industry and global knowledge workers.

By leveraging Microsoft Azure OpenAI Service and Moody’s strong data and analytical capabilities, the partnership aims to develop cutting-edge offerings that improve understanding of corporate intelligence and risk assessment.

In the same month, MSFT and H&R Block (HRB) announced a partnership through which HRB intends to leverage its Azure OpenAI services and leading generative AI technology to build faster and more consultative tax experiences, unleashing higher levels of innovation to inspire even more confidence in Block customers at tax time.

“Every year, millions of Americans turn to H&R Block for the unique expertise, help, and financial confidence that only we provide,” said Alan Lowden, H&R Block Chief Information Officer. “Now we are coupling our unmatched tax expertise with groundbreaking technology from OpenAI and Microsoft to drive even better customer experiences.”

Moreover, on April 17, MSFT and Epic announced the expansion of their strategic partnership to integrate generative AI into healthcare. By combining MSFT’s Azure OpenAI Service with Epic’s EHR software, the two companies aim to address pressing healthcare challenges and provide holistic solutions to healthcare providers.

Shares of MSFT have gained 36.5% over the past six months and 39.2% year-to-date to close the last trading session at $337.20. The stock is currently trading above its 50-day moving average of 325.85.

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

Advanced AI Cybersecurity with Microsoft Security Copilot

On March 28, MSFT made a significant cybersecurity breakthrough by introducing Microsoft Security Copilot, an advanced AI technology. This innovative tool enables quick detection and response to threats, as well as a comprehensive understanding of the threat landscape.

Given the daunting challenges faced by cybersecurity professionals, Security Copilot empowers MSFT to tilt the balance of power in its favor.

Robust Financials

During the third quarter that ended March 31, 2023, MSFT’s revenue increased 7.1% year-over-year to $52.86 billion, and its gross margin rose 8.8% from the year-ago quarter to $36.73 billion. Its operating income came in at $22.35 billion, up 9.8% year-over-year. The company’s net income grew 9.4% year-over-year to $18.30 billion, and its EPS rose 10.4% from the prior-year quarter to $2.45.

Additionally, the company’s cash and cash equivalents were $26.56 billion as of March 31, 2023, compared to $13.93 billion as of June 30, 2022.

Favorable Analyst Estimates

Analysts expect MSFT’s revenue for the fourth quarter that ended June 2023 to rise 6.9% year-over-year to $55.42 billion. The company’s EPS is expected to increase 14.4% year-over-year to $2.55 in the same quarter. Also, the company has surpassed the consensus EPS estimates in three of the trailing four quarters, which is impressive.

Furthermore, MSFT’s revenue and EPS are expected to increase 12.3% and 13.9% from the previous year to $368.55 billion and $10.98, respectively, for the fiscal year 2024.

Reliable Dividend

Currently, MSFT pays an annual dividend of $2.72 per share, which results in a yield of 0.821% on the current stock price. Over the past four years, the average dividend yield for MSFT has been 0.98%.

Also, the company has experienced a CAGR of 10.2% in its dividend payouts over the past three years. MSFT also has an impressive track record of consistently increasing its dividend for 18 consecutive years.

High Profitability

MSFT’s trailing-12-month net income margin of 33.25% is significantly higher than the industry average of 1.97%. Its trailing-12-month EBIT and EBITDA margins of 41.42% and 48.21% are 845.5% and 462.9% higher than the 4.39% and 8.57% industry averages.

In addition, MSFT’s trailing-12-month ROCE, ROTC, and ROTA of 38.60%, 20.87%, and 18.16% are remarkably higher than the industry averages of 0.50%, 1.78%, and 0.02%, respectively.

POWR Ratings Show Promise

MSFT’s robust fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Buy in our proprietary rating system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MSFT’s B grade for Stability is justified by its 60-month beta of 0.91.

It has a B grade for Quality, in sync with its higher-than-industry profitability. In addition, the stock has a B grade for Sentiment, consistent with its favorable analyst expectations.

MSFT is ranked #12 in the 49-stock Software-Business industry.

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

Bottom Line

MSFT’s revenue and EPS have grown at 14.4% and 15.4% CAGR over the past three years.

In addition, the software giant’s commitment to innovation is clearly demonstrated by its numerous partnerships in efforts to promote the adoption of AI in this era dominated by artificial intelligence.

Also, with a strong emphasis on AI, the company has made remarkable strides, resulting in substantial growth and positioning itself as the preferred option for customers in search of state-of-the-art solutions.

Satya Nadella, chairman and CEO of MSFT, said, “Across the Microsoft Cloud, we are the platform of choice to help customers get the most value out of their digital spend and innovate for this next generation of AI.”

Moreover, MSFT has steadily increased the amount it distributes to shareholders through dividends, reflecting its strong financial performance and commitment to returning value to investors.

With positive recent developments, robust financial performance, favorable analyst estimates, and a solid commitment to innovation, MSFT demonstrates its potential as a strong investment opportunity. Hence, MSFT could be a solid buy this week.

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 with an A (Strong Buy) rating: F5 Inc. (FFIV), Sapiens International Corporation N.V. (SPNS), and VMware Inc. (VMW).

What To Do Next?

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MSFT shares rose $2.27 (+0.67%) in premarket trading Thursday. Year-to-date, MSFT has gained 42.12%, versus a 17.88% rise in the benchmark S&P 500 index during the same period.

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About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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