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Should You Buy Microsoft (MSFT) Stock Ahead of Q4 Earnings?

Benjamin Rains
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Should You Buy Microsoft (MSFT) Stock Ahead of Q4 Earnings?

Shares of Microsoft (MSFT) slipped in morning trading Wednesday, just one day before the company is set to report its Q4 and fiscal 2018 financial results. This might be a sign that investors are nervous about Microsoft ahead of its earnings release, but MSFT stock has still outpaced its industry and the S&P 500 since the start of the year.

Shares of Microsoft MSFT slipped in morning trading Wednesday, just one day before the company is set to report its Q4 and fiscal 2018 financial results. This might be a sign that investors are nervous about Microsoft ahead of its earnings release, but MSFT stock has still outpaced its industry and the S&P 500 since the start of the year.

Overview

Microsoft has bolstered its business in recent years in order to adapt and grow in the new age of computing, with a big push into artificial intelligence, IoT, and more. The firm now competes directly against the likes of Amazon AMZN, Oracle ORCL, and Google parent Alphabet GOOGL in the cloud computing industry. Last quarter, the company’s revenues surged 16% to hit $26.8 billion. Intelligent Cloud revenues climbed 17% to hit $7.9 billion, driven by 93% growth in its widely popular Azure unit.

The company’s Productivity & Business Processes unit, which includes Office, Office 365, LinkedIn, and Dynamics CRM businesses, also surged. Meanwhile, Microsoft’s More Personal Computing division that features its historic Windows business remained the company’s single biggest revenue driver.

Microsoft has innovated from within and has also purchased an array of firms to help it expand. This includes its $7.5 billion acquisition of open source software powerhouse GitHub in June. And just a few days ahead of its Q4 earnings release—which won’t impact the results—Microsoft secured a five-year deal with Walmart WMT that will see the retail company utilize MSFT’s cloud services, AI, and more (also read: Why Microsoft Just Picked a Side in the Walmart-Amazon War).

Price Movement

The company’s strong top and bottom line performance in recent years, coupled with constant innovation and acquisitions has helped its stock price surge over 234% during the last five years. More recently, MSFT stock has nearly doubled its industry’s average climb, up 124% during the last three years—including a roughly 98% surge over the last 24 months.

 

Valuation

Microsoft’s recent performance has caused its valuation picture to appear just a tad bit stretched. MSFT stock is currently trading at 26.5X forward 12-month Zacks Consensus EPS estimates, which does mark a significant discount compared to its industry’s 32.9X average.

However, Microsoft has traded as low as 21.9X over the last year, with a one-year median of 24X, and is currently trading at its year-long high—that also happens to be its 10-year high.

 

Q4 & Fiscal 2018 Outlook

Our current Zacks Consensus Estimates are calling for Microsoft’s fiscal Q4 revenues to climb by 18.24% to reach $29.21 billion, with its full-year revenues projected to touch $109.41 billion. At the other end of the income statement, the firm’s adjusted Q4 ESP figure is expected to hit $1.07 per share, which would mark over a 9% climb. For fiscal 2018, Microsoft’s earnings are projected to climb by 16% to $3.84 per share.

Earnings Upgrades & ESP Whispers

Moving on, the company has received one downward earnings estimate revisions for Q4 within the last 30 days, along with one full-year upward change within the last seven days.

Investors should also note that Microsoft’s Most Accurate Estimate—the representation of the most recent analyst sentiment—is calling for earnings of $1.08 per share, which is one cent better than our current consensus estimate.

Furthermore, Microsoft has a stellar management team that has helped it top our estimates in 14 out of the last 15 quarters, including the trailing eight periods. We judge the price effect of these earnings beats by comparing the closing price of the stock two days before the report and two days after the report, and MSFT stock has popped in seven out of these last eight windows, including significant climbs of 3.8%, 1.6%, and 6.6% over the last three periods.

Bottom Line

Microsoft is currently a Zacks Rank #3 (Hold) based on its recent earnings revision activity and does not present strong value based on its own history. Not to mention that its stock price currently rests just below its 52-week and all-time high.

But the company has gone on an impressive climb and is positioned to continue to expand in an array of new growth sectors. Therefore, MSFT stock might be worth considering ahead of the release of its Q4 financial results Thursday afternoon.

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