A strong earnings report late last month helped Microsoft (NASDAQ: MSFT) to bounce its lowest level since last June. However, shares of the iconic software maker have struggled to maintain their upward momentum and remain just 4% above their 10-month low.
Buoyed in part by general concerns about interest rates and the economy, which have weighed on the broader stock market since late last year, MSFT has languished in recent months. With the company betting on strong growth in its cloud business and a pending $69 billion deal to acquire Activision Blizzard (ATVI), has the stock turned into a buy?
Microsoft bets on the cloud and games
Last week, Microsoft (MSFT) reported earnings that beat expectations. That was fueled by better-than-expected revenue growth, with revenue up nearly 19% year-on-year to $49.4 billion. That beat the analyst consensus of $350 billion.
Cloud revenue led the expansion, with the division posting 26% growth last quarter. Meanwhile, the company was aiming for 47% growth for its cloud computing service Azure, part of a forecast according to Wedbush Securities analyst Dan Ives that would be “heard around the world”.
Shares rose immediately after the earnings release, climbing nearly 5% the next day and continuing with another 2.5% gain the following session. However, unsteady trading in the global market undermined the stock’s momentum. The Nasdaq plunged more than 4% last Friday – a move that was reflected in MSFT’s own 4% drop this session, ending its post-earnings excitement.
Meanwhile, rising earnings only pulled the stock off multi-month lows. The day before its earnings release, MSFT closed at $270.22 – its lowest close since late June 2021.
Overall, shares are now 19% lower than the 52-week high of $349.67 at the end of last year.
Among the overhangs facing MSFT stock is its attempted acquisition of Activision (ATVI). In January, MSFT announced an agreement to buy the video game maker for $95 per share in cash, or a total of about $69 billion. The transaction aims to strengthen MSFT’s position in the gaming market, in addition to its Xbox business.
However, investors showed some skepticism about the deal’s prospects. ATVI is currently trading near $79, well below the merger’s contemplated purchase price. There are concerns that regulators will look askance at any large purchase by a megacap player.
At the same time, the companies gave the deal a long gestation period, saying only that they expected to complete the deal before July 2023.
Is MSFT a purchase?
Wall Street has an almost universally bullish view of Microsoft (MSFT). Of the 48 analysts surveyed by Seeking Alpha, only one has a less bullish view of the software maker, with a single Hold rating spoiling the cheering session.
Otherwise, 34 analysts have Strong Buy ratings, while another 13 give the stock a Buy recommendation.
When it comes to quantitative measures, however, the picture becomes more complicated. Seeking Alpha’s Quant Ratings considers the title a Hold. While MSFT scores an A+ for profitability and an A- for momentum, it receives a D+ for growth and a D- for valuation.
To better understand MSFT’s cautious view, read a deep dive from SA contributor BeanKounter CapitalSun, who says the stock is “still not a bargain.” For a more optimistic view, see why JB Meathe, another SA contributor, calls Azure “a generational opportunity.”