3 reasons to buy Microsoft and 1 reason to sell

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Microsoft‘s (NASDAQ: MSFT) The share price hit an all-time high after the tech giant released its first quarter report on Tuesday, October 26. Its revenue grew 22% year-on-year to $ 45.3 billion, beating analysts’ estimates of $ 1.3 billion. Its adjusted earnings rose 25% to $ 2.27 per share, beating expectations by $ 0.19.

For the second quarter, Microsoft expects its revenue to grow 16% to 18% year-over-year, which also exceeds analysts’ expectations for growth of 14%.

Microsoft’s numbers were impressive, but some investors might be reluctant to buy its shares after its price has already risen nearly 50% this year. Let’s go over three reasons to buy Microsoft stocks – along with one reason to sell them – to see if it’s still a worthwhile investment at these prices.

Image source: Getty Images.

1. The growth of Microsoft Cloud

Microsoft’s spectacular growth over the past seven years has been driven by the expansion of its cloud services, which include Azure, Office 365, Dynamics, LinkedIn and its other cloud-based software. The company reports the growth of these businesses together under the name “Microsoft Cloud”.

Microsoft Cloud’s revenue grew 36% year-over-year to $ 20.7 billion in the first quarter, matching its growth rate of 36% in the fourth quarter.

Azure, the most watched segment of Microsoft Cloud, increased its revenue by 48% at constant exchange rates. This represented an acceleration from Azure’s 45% constant currency growth in Q4 and should allay concerns about a potential slowdown.

Azure’s share of the global cloud infrastructure market also increased from 19% to 21% between the third quarters of 2020 and 2021, according to Canalys. This places him firmly in second place behind Amazon (NASDAQ: AMZN) Web Services (AWS), which saw its market share remain stable year-over-year at 32%.

Microsoft probably wouldn’t have achieved this growth without Satya Nadella, who took the helm as the company’s third CEO in 2014 and aggressively developed these services with his mantra of “mobile first, cloud first. “.

2. Reopening of the tailwinds

At the start of the pandemic, several Microsoft services for businesses, including Office 365 Commercial, Dynamics 365, and LinkedIn Marketing Solutions, suffered slowdowns as businesses shut down.

But those headwinds have faded as more businesses reopen. Office 365 Commercial and Dynamics 365 delivered accelerated growth at constant exchange rates in the first quarter, while LinkedIn Marketing continued to grow:

Income growth (YOY)

Q4 2021

Q1 2022

Office 365 Commercial

20%

21%

Dynamics 365

42%

45%

LinkedIn Marketing

91%

59%

Source: Microsoft. Constant exchange rate. YOY = Year after year.

This growth in these “reopening” segments, along with the continued growth of Azure and its other cloud services, offsets slower growth in Microsoft’s Surface and Xbox divisions, both of which have been affected by the chip shortage. and other supply chain constraints in the first quarter.

3. Return a lot of money to shareholders

Microsoft has turned into a high growth company again in recent years, but it continues to bring in tens of billions of dollars to its investors.

Microsoft spent more than $ 39 billion on dividends and buybacks in fiscal 2021, which was roughly 70% of its free cash flow (FCF). It spent an additional $ 10.9 billion, or 58% of its FCF, on both plans in the first quarter of 2022.

Microsoft’s 0.8% forward dividend yield won’t appeal to any serious investor, but it has reduced its stock count by nearly 10% over the past seven years, while offsetting dilution in its plans to invest. equity compensation.

The only reason to sell Microsoft: its valuation

Microsoft is now worth $ 2.4 trillion, roughly eight times its market capitalization of around $ 300 billion when Satya Nadella took over as CEO.

Its shares are currently trading at 13 times this year’s sales and 35 times forward earnings. These valuations are a bit foamy compared to analysts’ expectations for 14% sales growth and 9% earnings growth this year.

This massive market cap and high valuation could make it difficult for Microsoft to replicate its multibagger gains of the past seven years.

Is Now a Good Time to Buy Microsoft?

Microsoft stocks are highly valued, but the bears have been hitting the same drum for years as its stocks have skyrocketed. I think Microsoft deserves this premium valuation because it is still a solid long-term investment that will continue to benefit from the centuries-old expansion of the cloud services market.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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