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Proprietary Data Insights Financial Pros’ Top Tech Infrastructure Stock Searches in the Last Month
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Why Financial Pros Are Focused on Microsoft
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Microsoft (MSFT) might arguably be the best company in our lifetime. Think about it… It’s grown consistently ever since its inception, rarely experiencing slowdowns. Today, it’s at the forefront of cloud computing and artificial intelligence. The company’s latest earnings blowout brought even more eyeballs from financial pros who were already consistently making it one of the top 10 searches for the past two years, according to our TrackStar data. We feel that even at its current premium valuation, the stock is setting up for multi-decade growth. Microsoft’s Business From the early days of Windows 95, Microsoft has been at the forefront of software and services for everyone. Today, the company has its hands in traditional apps and operating systems like Microsoft Office and Windows. But it has also ventured into AI with a +$10 billion investment in OpenAI, which is rumored to be valued at $80 billion. Yet, that only scratches the surface. Microsoft’s business breaks down into the following three categories:
The company’s recent Q2 2024 earnings report exceeded expectations, with a revenue of $62.0 billion, marking an 18% increase from the previous year. Highlighted by a 45% growth in Azure cloud services, this performance illustrates Microsoft’s robust demand across its cloud, productivity, and gaming sectors. Microsoft also talked about its new Windows 12 launch and service devices expected to be released in 2024. Financials
Source: Stock Analysis Despite it’s size, Microsoft has managed to grow sales roughly 15% every year. Gross margins improved as sales mix changed, dropping straight through to the bottom line. Free cash flow margin contracted in recent years, mainly due to increased capital expenditures, hitting $35.2 billion last year compared to $15.4 billion in 2020. The company also shelled out $75.4 billion in 2023 for its Activision acquisition. Consequently, total debt jumped from $79.4 billion to $111.4 billion. Yet, with $102.6 billion in ooerpating cash flow and $58.7 billion in free cash flow, the debt doesn’t look so bad. Valuation
Source: Seeking Alpha Despite shares jumping more than 50% in the last year, Microsoft isn’t that overvalued. In fact, its forward P/E multiple of 34.9x is the second lowest of its peers, with Oracle (ORCL) being a bit cheaper. Even its price-to-cash-flow at 29.4x is slightly higher than its 5-year average of 24.8x and the industry average at 20.5x. So, while it’s expensive, we’d argue its not excessive. Growth
Source: Seeking Alpha Palo Alto Networks (PANW) and Fortinet (FTNT) lead the group in revenue growth looking backwards and forwards. And Fortinet’s earnings growth is fantastic. However, these companies are a fraction of the size of Microsoft. Yet, Microsoft grew sales and profits at respectable double digits, and has for years. No wonder it garners a premium valuation. Profitability
Source: Seeking Alpha What’s really impressive are Microsoft’s margins. Its 52.0% EBITDA margin trounces its peers. And while it’s 25.8% free cash flow margin looks weaker than its peers, remember that includes a massive acquisition of Activision. Our Opinion 9/10 Microsoft’s stock has gotten ahead of itself. But it could easily keep running for months. We won’t pretend to know when or where it might top out. All we can say is that as a multi-year hold, this company is worth every penny you pay for it. |
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