High-Value Microsoft still has Plenty of Room to Run

Key Points

• Microsoft hit a home run in Q1 F2024, and guidance points to more of the same. 
• Analysts praise the results and see Microsoft gaining a share in the cloud. 
• The stock is up 5% and could rise another 25% before hitting its next major roadblock. 

Microsoft may be highly valued NASDAQ: MSFT, but the company and stock price still have plenty of room to run. Valuation, the P/E multiple, and market cap are fickle things and driven by desire, and Microsoft is a desirable stock. The company is not only a blue-chip tech operator but a cutting-edge tech developer and leader in cloud computing. That alone is enough to command a higher-than-average multiple relative to the S&P 500, and then there is AI to consider.

The company has leaned hard into AI, leveraging its position in the cloud, and the results say it all. Microsoft, as big as it is, is growing, and growth is accelerating.

Microsoft Hits a Homerun in FQ1

Microsoft had a stellar quarter in FQ1. The company reported $56.5 billion in net revenue, good for a gain of 12.8% compared to last year. The 12.8% growth is relatively flat compared to last year’s growth but 350 basis points better than expected, and the sequential, segment, and segment guidance reveal acceleration that is expected to continue in FQ2 and F2024. 

Segmentally, Product & Business Services grew by 13%, with a solid showing by Search & Ad. Search & Ad revenue grew by 10%, aided by AI enhancement and aggressive marketing. The Intelligent Cloud segment, which includes Cloud Services and Azure, grew by 19%, with services up 29%. 

CEO Satya Nadella pointed out specific clients using Microsoft Azure for their cloud, including PepsiCo, and collaborations with companies like GitLab, which provide utility for development teams. More Personal Computing grew by 3%, but all segments show growth and Productivity & Business and Intelligent Cloud are both accelerating. 

Margin news is also good. The company’s revenue growth and efforts to control costs resulted in significant leverage. The GAAP earnings came in at $2.99 or up 27% YOY, outpacing the top line strength by 1400 basis points and the Marketbeat.com consensus estimate by 1280 bps. The guidance includes double-digit growth in Productivity & Business and Intelligent Cloud with More Personal Computing trending flat at pre-pandemic levels, adjusted for the Activision acquisition. 

Analysts Applaud Microsoft Quarter and Guidance

The analysts are leading Microsoft higher in 2023, and that trend will not end in Q4. The analysts' chatter is supportive and suggests the stock will move above the current consensus price target. That target is near $378 and implies about a 15% upside for MSFT shares; analysts like Wedbush’s Dan Ives and Citigroup’s Tayler Radke see the stock moving up into the $400 to $430 range. 

Mr. Ives called the quarter a home run, while Mr. Radke says the company simply delivered. In either case, they expect MSFT to solidify its leadership position in the cloud, with Copilot services leading the charge. Regardless, the consensus rating is Moderate Buy with a price target that is trending higher compared to last year, last quarter, and last month and is expected to continue increasing through the year’s end. 

The Technical Outlook: Microsoft is in a Secular Updraft

The opportunity in MSFT is so large it is best viewed with monthly price bars. In this view, it is easy to see MSFT shares are in a solid uptrend that accelerated during the pandemic and is now consolidating. The consolidation rebound is strong and bears the hallmarks of a Bullish Flag Pattern that may be confirmed following the Q1 release. The post-release action has the market up, confirming support at a critical level and testing resistance near the all-time high. Assuming the market follows through on this signal and sets a new high, this market could advance the magnitude of the flag pole or $90 to put it in the $400 to $430 range.