Tech titan Microsoft Corporation (MSFT), worth nearly $2.40 trillion, holds an impressive command over the PC software market, with approximately 70% of the desktop operating system market share. Beyond its dominant software sphere, MSFT has generated multiple revenue sources, including a strong cloud computing segment and a vital commitment to ChatGPT – a frontier of generative AI technology.

The software conglomerate has received considerable accolades for its endeavors in AI, positioning itself as an industry leader in integrating AI across its wide range of products and services. Consequently, the company has generated impressive gains, surpassing the Wall Street estimates in previous quarters.

Imminent reveals of three new Surface devices and AI-augmented features across Windows, Office, Bing, and Surface are anticipated at the upcoming event in New York City.

MSFT’s Surface portfolio, silicon technology, and physical devices are poised to shape the company's future client and cloud experiences. MSFT’s head of consumer marketing, Yusuf Mehdi, believes this would potentially revolutionize device and system functionality.

MSFT's expansive growth is partly due to its strategic partnerships, bolstering its existing reach and prospects. While the tech sector is familiar with surprise collaborations, the recent MSFT-Oracle Corporation (ORCL) alliance stands out.

On September 14, MSFT and ORCL announced Oracle Database@Azure, granting customers direct access to Oracle database services, running on Oracle Cloud Infrastructure (OCI) and deployed via Microsoft Azure datacenters. With MSFT joining ORCL, it becomes another leading tech giant offering ORCL's OCI database services that streamline cloud migration, multi-cloud deployment, and overall management.

MSFT’s Chairman and CEO, Satya Nadella, said, "Our expanded partnership with Oracle will make Microsoft Azure the only other cloud provider to run Oracle's database services and help our customers unlock a new wave of cloud-powered innovation."

Institutional investors have recently made changes to their MSFT stock holdings. Institutions hold roughly 70.8% of MSFT shares. Of the 4,959 institutional holders, 2,023 have increased their positions in the stock. Moreover, 203 institutions have taken new positions in the stock with 19,047,019 shares, reflecting signs of bullishness.

The stock has gained 33.8% over the past year to close its last trading session at $320.77. Moreover, Wall Street analysts expect the stock to reach $392.41 in the next 12 months, indicating a potential upside of 22.3%. The price target ranges from a low of $232 to a high of $440.

Here are some factors that could shape MSFT’s performance in the near term:

Robust Financials

MSFT’s total revenue increased 8.3% year-over-year to $56.19 billion in the fiscal fourth quarter that ended June 30, 2023, while its operating income rose 18.1% from the year-ago value to $24.25 billion.

The company’s net income and earnings per share grew 19.9% and 20.6% from the prior-year quarter to $20.08 billion and $2.69, respectively. In addition, its cash and cash equivalents amounted to $34.70 billion, up 149.1% from the year-ago value.

High Profitability

MSFT’s trailing-12-month gross profit margin of 68.92% is 41.2% higher than the 48.82% industry average. Its trailing-12-month EBIT and EBITDA margins of 41.77% and 48.14% are 825.5% and 426.1% higher than the industry averages of 4.51% and 9.15%, respectively. 

In addition, the stock’s trailing-12-month cash from operations of $87.58 billion is significantly higher than the industry average of $60.08 million.

Robust Historical Growth

Over the past three and five years, the company’s revenue grew at CAGRs of 14% and 13.9%, respectively. Its EBITDA and net income grew at respective CAGRs of 16.1% and 17.8%, respectively, over the past three years.

Favorable Analyst Estimates

Analysts expect MSFT’s revenue and EPS to increase 11.3% and 12.2% year-over-year to $235.85 billion and $11.01 for the fiscal year ending June 2024. Its revenue and EPS for the next fiscal year (ending June 2025) are expected to grow 13.3% and 15% year-over-year to $267.27 billion and $12.66, respectively.

Moreover, for the fiscal first quarter ending September 2023, MSFT’s revenue and EPS are expected to increase 8.8% and 12.6% year-over-year to $54.53 billion and $2.65, respectively. Furthermore, the company surpassed the consensus EPS estimates in all trailing four quarters and revenue estimates in three of the trailing four quarters, which is impressive.

POWR Ratings Show Promise

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

Our proprietary rating system also evaluates each stock based on eight distinct categories. MSFT has a B grade for Stability, in sync with its 60-month beta of 0.90.

The stock also has a B grade for Quality, consistent with its high profitability.

The optimistic analyst expectations justify its Sentiment grade of B.

MSFT is ranked #13 out of 45 stocks in the B-rated Software – Business industry.

Click here to access MSFT’s Growth, Value, and Momentum ratings.

Bottom Line

The software industry's future shimmers with immense potential, propelled by technology advancements, ubiquitous digital transformations across a range of industries, rapidly increasing adoption of data-driven solutions, and substantial capital investments in cloud technology. The global software market is anticipated to reach $1.59 trillion by 2032, growing at an 11.9% CAGR.

MSFT seems strategically positioned to profit significantly from these sector trends. Collaborations and partnerships have fueled the company's growth, broadening its customer base and increasing revenues. Further, its strong financial position, optimistic analyst projections, robust profitability, and notable growth prospects position it as an attractive investment opportunity.

Further strengthening this standpoint is MSFT’s consistent track record of rewarding shareholders. It returned $9.7 billion to shareholders through share repurchases and dividends in the fourth quarter of fiscal year 2023.

The company has maintained a steady dividend payment trend for the past 18 years. MSFT’s board of directors recently declared a quarterly dividend of $0.75 per share, reflecting a 7-cent or 10% increase over the prior quarter's dividend. The dividend is payable to the shareholders on December 14, 2023.

Its annual dividend stands at $3 per common share, translating to a 0.91% yield on the current share price. Its four-year average dividend yield is 0.94%. The company’s dividend payouts have grown at a CAGR of 10.1% over the past five years.

Furthermore, implementing a $60 billion share buyback initiative heralded in 2022, typically renewed by MSFT every several years, is set to continue through 2025. This represents another significant measure taken by the company to enhance shareholder value.

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

While MSFT has an overall POWR Ratings grade of B, equating to Buy, you may also check out these other stocks within the Software – Business industry: F5, Inc. (FFIV), VMware, Inc. (VMW), and Sapiens International Corporation N.V. (SPNS), with an A (Strong Buy) rating. For exploring more A and B-rated software stocks, click here.

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MSFT shares were trading at $323.03 per share on Thursday morning, up $2.26 (+0.70%). Year-to-date, MSFT has gained 35.62%, versus a 14.81% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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