Microsoft
(MSFT) has been one of the most searched-for stocks on Zacks.com lately. So, you might want to look at some of the facts that could shape the stock’s performance in the near term.
Shares of this software maker have returned +3.7% over the past month versus the Zacks S&P 500 composite’s +1.5% change. The Zacks Computer – Software industry, to which Microsoft belongs, has lost 1.2% over this period. Now the key question is: Where could the stock be headed in the near term?
Although media reports or rumors about a significant change in a company’s business prospects usually cause its stock to trend and lead to an immediate price change, there are always certain fundamental factors that ultimately drive the buy-and-hold decision.
Earnings Estimate Revisions
Here at Zacks, we prioritize appraising the change in the projection of a company’s future earnings over anything else. That’s because we believe the present value of its future stream of earnings is what determines the fair value for its stock.
Our analysis is essentially based on how sell-side analysts covering the stock are revising their earnings estimates to take the latest business trends into account. When earnings estimates for a company go up, the fair value for its stock goes up as well. And when a stock’s fair value is higher than its current market price, investors tend to buy the stock, resulting in its price moving upward. Because of this, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
Microsoft is expected to post earnings of $2.29 per share for the current quarter, representing a year-over-year change of +5.5%. Over the last 30 days, the Zacks Consensus Estimate has changed -0.6%.
The consensus earnings estimate of $9.27 for the current fiscal year indicates a year-over-year change of +16.3%. This estimate has changed -0.7% over the last 30 days.
For the next fiscal year, the consensus earnings estimate of $10.51 indicates a change of +13.4% from what Microsoft is expected to report a year ago. Over the past month, the estimate has changed -0.7%.
With an impressive
externally audited track record
, our proprietary stock rating tool — the Zacks Rank — is a more conclusive indicator of a stock’s near-term price performance, as it effectively harnesses the power of earnings estimate revisions. The size of the recent change in the consensus estimate, along with three other
factors related to earnings estimates
, has resulted in a Zacks Rank #4 (Sell) for Microsoft.
The chart below shows the evolution of the company’s forward 12-month consensus EPS estimate:
12 Month EPS
Projected Revenue Growth
Even though a company’s earnings growth is arguably the best indicator of its financial health, nothing much happens if it cannot raise its revenues. It’s almost impossible for a company to grow its earnings without growing its revenue for long periods. Therefore, knowing a company’s potential revenue growth is crucial.
For Microsoft, the consensus sales estimate for the current quarter of $52.28 billion indicates a year-over-year change of +13.3%. For the current and next fiscal years, $198.37 billion and $224.29 billion estimates indicate +18% and +13.1% changes, respectively.
Last Reported Results and Surprise History
Microsoft reported revenues of $49.36 billion in the last reported quarter, representing a year-over-year change of +18.4%. EPS of $2.22 for the same period compares with $1.95 a year ago.
Compared to the Zacks Consensus Estimate of $48.96 billion, the reported revenues represent a surprise of +0.81%. The EPS surprise was +1.83%.
The company beat consensus EPS estimates in each of the trailing four quarters. The company topped consensus revenue estimates each time over this period.
Valuation
No investment decision can be efficient without considering a stock’s valuation. Whether a stock’s current price rightly reflects the intrinsic value of the underlying business and the company’s growth prospects is an essential determinant of its future price performance.
While comparing the current values of a company’s valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S) and price-to-cash flow (P/CF), with its own historical values helps determine whether its stock is fairly valued, overvalued, or undervalued, comparing the company relative to its peers on these parameters gives a good sense of the reasonability of the stock’s price.
The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to both traditional and unconventional valuation metrics to grade stocks from A to F (an An is better than a B; a B is better than a C; and so on), is pretty helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.
Microsoft is graded D on this front, indicating that it is trading at a premium to its peers.
Click here
to see the values of some of the valuation metrics that have driven this grade.
Bottom Line
The facts discussed here and much other information on Zacks.com might help determine whether or not it’s worthwhile paying attention to the market buzz about Microsoft. However, its Zacks Rank #4 does suggest that it may underperform the broader market in the near term.
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