Microsoft’s stock plunge of 28% so far in 2022 amid growth concerns now seems overblown, says Morgan Stanley.
“While investors worry that forward numbers have not been reduced, we are seeing a strong (and sustained) demand signal in commercial activities, which should lead to improved earnings and EPS growth in the 2H23,” Morgan Stanley analyst Keith Weiss wrote in a note. tuesday.
As a result, the tech giant’s valuation is too cheap to ignore, Weiss argued.
“Trading at ~20x CY24 GAAP earnings, accelerating EPS growth should bring investors back to the name,” Weiss added.
Here are more details on Morgan Stanley’s defense of Microsoft shares:
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Evaluation: Overweight (repeat)
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Price target: $307 (raised $296)
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Estimated EPS for fiscal year 2023: $9.51 (consensus: $9.55)
Weiss acknowledged that investors have valid concerns about Microsoft’s near-term growth trajectory based on current economic conditions.
“Short-term investor concerns about Microsoft generally fall into two categories,” Weiss said, “margin and revenue growth — or more specifically: 1) a larger-than-expected operating expense guide to the second quarter, signaling management’s reluctance to cut expenses and improve protect operating margins, and 2) a revenue forecast for sustainable business growth of 20% constant currency (cc) that does not appear to be derisked (d (especially since sales were up 22% cc in Q1). From our perspective, the two concerns of investors go hand in hand.”
However, Weiss’ research found that demand for Microsoft remains strong.
“Digging deeper, several factors lead us to believe that business activity should be more sustainable than expected for Microsoft, despite near-term macroeconomic pressures,” the analyst said.
He listed them as follows:
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“Demand signals remain positive, with management conversations, earnings commentary, channel work and our CIO survey supporting 20% business growth.”
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Operating expenses are expected to normalize in the second half of fiscal 2023: “Although operating expenses continued to increase in 2QFY23, this is largely due to prior hiring, mergers and acquisitions and the increased compensation expense as we exit FY22. With a pause in hiring, operating expense growth is expected to moderate significantly in the second half as we celebrate the anniversary of hiring more aggressive – we are modeling operating expense growth of 15% year-over-year in 1HFY23, falling to 8% year-over-year in 2HFY23.”
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“Several revenue tailwinds are heading towards 2HFY23. Lower onerous incremental currency impacts so far this quarter, which should fade further in the second half, increasing O365’s pricing advantages, as well as Easier comparisons for Windows OEM, Office Commercial, LinkedIn and Dynamics titles in 2HFY23 should all support more robust revenue growth.”
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“Valuation remains favourable. At ~20×2024 EPS, or ~1.2x 2-year price/earnings growth, Microsoft is trading at a discount to its historical trading range, to other large-cap software peers, as well as other mega-cap tech names.”
This chart from Weiss highlights that the demand backdrop for a leader like Microsoft is still strong.
Brian Sozzi is editor-in-chief and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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