Michael Kramer and the clients of Mott Capital own MSFT
Microsoft Corp. (MSFT) reported solid quarterly results, with revenue and earnings easily topping analysts’ expectations. Despite the strong beat, the stock has seen a muted reaction from investors, trading nearly unchanged after-hours. There are two reasons for that; first, the strong results appear to have already been baked into the stock price, with the shares trading at a peak earnings multiple. Second, the company provided guidance for the fiscal second quarter that was slightly weaker than estimates.
Make no mistake; the results were much better than expected, with revenue of roughly $37.2 billion and earnings of $1.82 per share. It was better than analysts’ estimates for $35.7 billion in revenue, with earnings of $1.54, a massive beat across the top and bottom lines. The strong results were driven by its intelligent cloud segment, with revenue increasing by almost 20% to approximately $13 billion.
Still, even with those strong results, the stock trades at around 30 times one-year forward estimates. That is the stock’s highest valuation since 2002, following the implosion of the technology bubble of the late 1990s. The high valuation reflects that a lot of this good news has already been baked into the price.
Even when looking at the company’s future growth, analysts project earnings to rise by 13.4% in the fiscal year 2022 and 15.6% in fiscal 2023. It means when adjusting the stock for future earnings growth, one will find the PEG ratio is well above 2.
It didn’t help that the company gave guidance that was slightly shy of expectations. Microsoft noted that they expect to have revenue in the fiscal second quarter of around $40 billion at the mid-point of the range. That is below analysts consensus estimates for $40.4 billion.
Still, the stock has been trending higher for some time, and if the market starts to rise, Microsoft will likely go along. Should the stock manage to rise above $216, it could reach its prior highs around a price of $231. However, a failure to break above resistance at $216 could signal the stock has further to fall, potentially to around $198. The relative strength index has been trending lower, indicating that bullish momentum has been leaving the shares.
Unfortunately, in an environment where valuations are stretched, it takes more than strong quarterly results to keep a stock moving higher. In this case, investors may just have a wait a bit and let the company grow into the valuation the market has given it.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
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