Microsoft Poised for Q2 Growth Following 63% Surge in 2023

Microsoft’s Fiscal Q2 2024 Outlook

Microsoft (NASDAQ: MSFT) is set to unveil its fiscal Q2 2024 results on January 30, 2024. Analysts anticipate the company to surpass consensus estimates on both revenue and earnings. In the previous quarter, net revenues soared by 13% year-over-year to $56.5 billion. The growth was primarily propelled by a 13% surge in the productivity & business processes unit and a substantial 19% increase in the intelligent cloud segment. Furthermore, total expenses as a percentage of revenues witnessed a favorable decline, indicating a positive trend expected to continue in the upcoming results.

Amid the current financial climate, MSFT has experienced a formidable 75% surge from early January 2021 to around $390, far outpacing the S&P 500’s 25% increase during the same period. Notably, Microsoft’s stock performance has been anything but steady, with returns of 52% in 2021, -28% in 2022, and 57% in 2023. Comparatively, the S&P 500 reported returns of 27% in 2021, -19% in 2022, and 24% in 2023, underscoring Microsoft’s underperformance in 2022. This challenges the traditional notion of beating the S&P 500, a feat unattainable for many individual stocks and sector heavyweights, including AAPL, NVDA, AVGO, GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, consisting of 30 stocks, has consistently outperformed the S&P 500 annually.

Given the current volatile macroeconomic environment characterized by soaring oil prices and elevated interest rates, investors are left to wonder whether Microsoft will encounter a repeat of its 2022 underperformance or secure a robust surge over the next year.

Revenue and Earnings Projection

Microsoft is forecasted to have a valuation of $409 per share, representing a 5% premium over the current market price. It is anticipated that Microsoft’s net revenues for fiscal Q2 2024 will reach around $61.74 billion, slightly surpassing the consensus estimate of $61.13 billion.

Notably, Microsoft’s revenues surged by 7% year-over-year to $211.9 billion in FY 2023, and the positive momentum carried into the first quarter of FY2024. Broken down by segment, the productivity & business processes unit saw a 9% revenue increase in FY2023, attributable to higher Office 365 commercial revenues, and a similar trend is expected in Q2. The intelligent cloud segment experienced a robust 17% revenue growth in FY2023, and Q1 continued to demonstrate this uptrend. Although the More personal computing segment witnessed an 8% year-over-year revenue dip in FY2023 due to reduced Windows and Xbox revenues, a marginal growth was reported in the first quarter, suggesting potential improvement in segment revenues for Q2. Overall, Microsoft’s revenues are projected to reach $240.7 billion for FY2024.

Furthermore, Microsoft’s Q2 2024 adjusted earnings per share (EPS) is expected to amount to $2.82, slightly surpassing the consensus estimate of $2.78. The company experienced a 1% year-over-year drop in net income to $72.4 billion in FY2023, but Q1 marked a notable improvement, with net income soaring by 275% year-over-year to $22.3 billion. The company is poised to maintain this positive trajectory, ultimately culminating in an anticipated annual GAAP EPS of $11.28 for FY 2024.

Based on a GAAP EPS estimate of approximately $11.28 and a P/E multiple slightly above 36x in fiscal 2024, Microsoft’s valuation is projected at $409, representing a 5% premium over the current market price.