Should I invest in Microsoft shares after strong earnings results?

By: Stanko Iliev
Stanko Iliev
Stanko dedicates himself to providing investors with relevant information they can use to make investment decisions. He loves the… read more.
on Jul 28, 2021
  • Microsoft reported better than expected fourth-quarter results this week
  • Total revenue has increased by 21.5% Y/Y to $46.2 billion
  • RBC Capital Markets boosted its price target to $360 on Microsoft

Microsoft Corporation (NASDAQ: MSFT) shares have advanced more than 5% since the beginning of July 2021; the company reported better than expected fourth-quarter results this Tuesday and expects to see even better trends in the upcoming quarter.

Fundamental analysis: Microsoft increased its revenue forecast for the first fiscal quarter

Microsoft’s business has proven improvements throughout the fourth fiscal quarter, and the company reported better than expected results this week. Total revenue has increased by 21.5% Y/Y to $46.2 billion, while the fourth quarter Non-GAAP EPS was $2.17 (beats by $0.25).

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Revenue from Productivity and Business Processes was $14.7 billion (+25%), revenue from the Intelligent Cloud segment was $17.4 billion (+30%), while the revenue from the Personal Computing segment was $14.1 billion (+9%).

On a full fiscal year basis, total revenue has increased from $143.01 billion in the 2020 fiscal year to $168.08 billion in the 2021 fiscal year, while the net income increased from $44.28 billion in the 2020 fiscal year to $61.27 billion in 2021 fiscal year. The commercial cloud segment surpassed $69 billion in annual revenue, up 34%, and it is important to mention that LinkedIn’s revenue surpassed $10 billion for the first time this fiscal year, up 27%.

For the 2021 fiscal year, Microsoft generated around $76 billion in operating cash flow and returned over $39 billion to shareholders through share repurchases and dividends. Microsoft increased its revenue forecast for the first fiscal quarter during the fiscal fourth-quarter earnings call, and the consistent strong execution should drive healthy growth in the next quarter.

“We remain focused on driving revenue growth as we invest boldly against the strategic high-growth opportunities ahead that will deliver significant value to our customers worldwide,” said Amy Hood, CFO of Microsoft.

The research company Cowen increased its price target to $320 on Microsoft, RBC Capital Markets boosted its price target to $360, while Piper Sandler pushed its price target up to $310. The consensus Wall Street rating on Microsoft remains bullish, but probably it is not the best moment to invest in shares of this company.

Microsoft is in a good position to grow its business, but with a $2.18 trillion market capitalization, this stock does not represent an opportunity for long-term investors. Microsoft trades at more than twenty-five times TTM EBITDA, the book value per share is less than $20, and lots of positive expectations have already been included in the stock price.

Technical analysis: $270 represents the current support level

Technically looking, Microsoft shares could advance above the current price levels in August 2021, but the risk/reward ratio is not good for long-term investors.

Data source: tradingview.com

If the price jumps above $300, the next target could be around $310, but if the price falls below the $270 support level, it would be a firm “sell” signal.

Summary

Microsoft reported better than expected fourth-quarter results this Tuesday and raised its outlook for the upcoming quarter. The consensus Wall Street rating on Microsoft remains bullish, but probably it is not the best moment to invest in shares of this company.

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