Microsoft’s Lower Valuation May Attract Investors

Microsoft (MSFT), the world’s third-biggest company with a market capitalization of $1.9 trillion, will report Q4 quarterly earnings after the close today.  The market consensus is for the company to report earnings growth of 6% and revenue growth of 14%, which would extend a years-long streak of double-digit sales expansion. 

Microsoft’s shares have fallen -23% this year, a slightly smaller drop than the -24% slide in the Nasdaq 100 ($IUXX) (QQQ).  Microsoft now trades at 24 times estimated earnings, below its five-year average of 27.4. Although the company hasn’t been immune to this year’s tech stock selloff, its business software and cloud-computing offerings are seen as limiting a slide in sales during an economic downturn. 

In June, Microsoft cut its Q4 outlook and said it would slow hiring in its security software and Azure cloud businesses, given the stronger dollar and weaker economic conditions. Most analysts have stayed bullish on the stock despite these issues, saying the stock’s fundamentals are still sound.  More than 90% of analysts have kept their buy recommendations on Microsoft, the second-highest rated stock in the Nasdaq 100 after Crowdstrike Holdings (CRWD).

Analysts have lowered their earnings growth estimates for software stocks this year but remain primarily positive on the sector.  According to data from Bloomberg Intelligence, analysts predict software and services companies will report 2022 earnings growth of +13.6%, down from the +14.8% growth expected back in January.

According to Bloomberg data, the consensus view is that Microsoft’s Q4 earnings have fallen by -2.9% over the past three months, with Q4 revenue down -0.6%.  However, if today’s earnings report shows revenue close to expectations, that would extend the streak of double-digit growth that began in 2017. Microsoft’s valuation is more of a bargain today than during the 2021 tech surge.  Los Angeles Capital Management said, “within the software sector, Microsoft’s valuation is supported by real improvements in the fundamentals.” 

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