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Look for Microsoft Stock to See a Big Post-Earnings Pop

Things will pick up soon for Microsoft stock

After the stock bottomed at $120 in June, Microsoft Corporation (NASDAQ:MSFT) shares traded to new highs at $141.68. But since August, the stock is stuck in a very narrow trading range at $136. Microsoft stock still is modestly high but the P/E has room to expand.

Look for Microsoft Stock to See a Big Post-Earnings Pop
Source: gguy /

Expect Microsoft to report a strong Q1 report next month, following last quarter’s (Q4) results. In the last period, the company reported double-digit growth from all but one segment.

Its Intelligent Cloud division grew 19% year-on-year, while the More Personal Computing grew 4%. Still, the gross margin of 15% is a 2 point improvement. At an EPS of $1.71 or an annualized P/E of 19.9 times, MSFT stock borders on being too cheap to ignore.

Investors may hunt for inexpensive technology stocks like Intel (NASDAQ:INTC), whose P/E is 12.2 times. But Intel faces elevating competitive pressures from AMD (NASDAQ:AMD), so the stock reflects the uncertainties ahead.

Microsoft has strong bookings growth in the commercial space. In Q4, bookings grew 25%, with the commercial revenue annuity mix accounting for 90% of that total.

The software giant is in the sweet spot of enjoying recurring revenue. Its commercial cloud revenue, which made Microsoft $11 billion in revenue, enjoyed a gross margin of 65%.

Growth Catalysts and Microsoft Stock

Microsoft has many growth catalysts to count on in the next quarter and in 2020. Office software sales are benefiting from commercial clients signing up for Office 365, and on the consumer market, revenue grew 6% in the last quarter. Microsoft now has 34.8 million consumer subscribers. With the Apple (NASDAQ:AAPL) smartphone refresh and Android suppliers like Samsung and Xaomi launching new devices, expect more Office 365 sign-ups next year.

The intelligent cloud space enjoys even better growth. Azure revenue grew 64%, which suggests Microsoft is taking market share from’s (NASDAQ:AMZN) AWS.

Although hardware sales contribute to only a small part of revenue, it too is growing. Surface revenue grew 18% in Q4/FY2019. Microsoft will host the next Surface event, slated for Oct. 2.

Announcing a refreshed Surface, one year after the last launch and ahead of the holidays may prove timely. Last week, Apple announced a new iPad and MacBook Air. Microsoft may announce a Surface Pro 6 hybrid, an updated Surface Go tablet, and a Surface laptop.

Personal Computing and Microsoft Stock

The Windows operating system is still at the core of the company’s growth ambitions. Commercial markets still need new PCs every few years and a stable operating system.

As the market prepares for the end of Windows 7 support, expect a surge in sales of Windows 10 software. And even though Surface device sales brought in $2.05 billion, down from $2.29 billion last year, look for Microsoft to enjoy the hype for these products. If Surface devices become the standard for the hybrid notebook and tablet form factor, it has a good chance of taking Apple’s iPad market share.

Apple claimed 38.1% of the global tablet market in the second quarter. Samsung, Huawei, and Amazon claim the number two to four positions. Microsoft is not on the list. If IDC does not consider the Surface as a tablet, it does not matter. Microsoft needs to convince consumers and businesses to choose a Surface or Surface Go device over an iPad for work purposes.

The Bottom Line on Microsoft Stock

Analysts who offer a 1-year price target on MSFT stock think the stock is worth $153.77. This is ~13% above the recent price of $136.33. Various DCF EBITDA and Revenue exit models suggest the stock is trading at close to fair value.

It will take an uptick in revenue growth in the next quarterly report, due next month in October, to justify a higher stock price. Chances are good that will happen.

Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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