(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Microsoft Corp's. (MSFT) stock has risen by more than 50% over the past year, leaving the S&P 500 in the dust. Now analysts are looking for Microsoft to rise even higher, by as much as 10% from the current stock price of roughly $110.
The software company reported better than expected quarterly results that beat analysts' estimates by nearly 5%, and revenue that came in 3% higher, driven by strong cloud growth. The better than expected results have prompted analysts to raise their earnings outlook for the fiscal first quarter and full year 2019, as well as their price targets. Some options traders are bullish on Microsoft too, with the number of open calls outweighing the open puts by a ratio of 6 to 1, at the $110 strike price for expiration in January. (For more, see also: Microsoft Reports Within a Zone of Risky Levels.)
Analysts are looking for shares to climb to an average price target of roughly $121, that is up from $112 just at the start of July. The higher price target comes as estimates for the full-year increase. Now, analysts are looking for earnings in fiscal 2019 to climb by 10% from their previous view of just 4%. Additionally, revenue growth is forecast to rise around 11% from only 9%.
Higher Estimates for Coming Quarter
The upcoming fiscal first quarter is expected to be strong as well with earnings seen climbing by 14.2%, up from a prior view of roughly 9%. Revenue growth is expected to increase by more than 13%, up from previous estimates of about 11.6%.
Valuation Is Lower
With the business outlook and estimates climbing, the valuation for the stock has come down to 22 times one-year forward earnings estimates, from roughly 25. Although it doesn't make the stock cheap when adjusting for growth, with a PEG ratio of 1.5, it does place the valuation back to the lower end of its historical range since the middle of 2017. (For more, see also: Microsoft Bulls Look for More Big Gains.)
The strength of its cloud business has driven Microsoft's stock to record heights, and now investors and analysts are looking for even more growth. It means the company will need to deliver not only inline results but better than expected results to keep the momentum in the stock moving higher.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.