Microsoft (MSFT) is one of the most searched stocks on Zacks.com recently. So, you might want to look at some of the facts that could affect a stock’s performance in the short term.
Over the past month, shares of the software maker have returned +3.5%, compared to the Zacks S&P 500’s +2.8% change. During that period, the Zacks Computer – Software industry, which includes Microsoft, gained 3.4%. The key question now is: What could be the future direction of stocks?
While media releases or rumors of a significant change in a company’s business outlook usually make its stock ‘trend’ and lead to an immediate price change, there are always some underlying facts that ultimately dominate buy-and-hold decisions.
Revisions of earnings estimates
Rather than focusing on anything else, we at Zacks prioritize evaluating the change in a company’s earnings projection. This is because we believe that the fair value of its shares is determined by the present value of its future earnings stream.
We are essentially watching sell-side analysts covering the stock revise their earnings estimates to reflect the impact of the latest business trends. And if earnings estimates increase for a company, so does the fair value of its stock. A higher fair value than the current market price stimulates investor interest in buying the stock, leading to an increase in the price. This is why empirical research shows a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
Microsoft is expected to post earnings of $2.84 per share for the current quarter, which represents a year-over-year change of +15.9%. Over the past 30 days, the Zacks Consensus Estimate has remained unchanged.
The consensus earnings estimate of $11.63 for the current fiscal year indicates a year-over-year change of +18.6%. This estimate has remained unchanged over the past 30 days.
For the next fiscal year, the consensus earnings estimate of $13.15 indicates a change of +13.1% from what Microsoft is expected to report a year ago. Over the past month, the assessment has remained unchanged.
Given the strong outside revision, our proprietary stock rating tool, Zacks Rank, offers a more compelling picture of the stock’s near-term price direction, as it effectively leverages the strength of the earnings estimate revision. Due to the size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, Microsoft is ranked a Zacks No. 2 (Buy).
The chart below shows the evolution of the company’s 12-month EPS consensus estimate:
12 months of earnings per share
Revenue growth forecast
While earnings growth is arguably the best indicator of a company’s financial health, nothing happens if a company is unable to grow its revenues. After all, it is almost impossible for a company to increase its earnings over a long period of time without increasing its revenues. So, it is important to know the company’s potential revenue growth.
In Microsoft’s case, the consensus sales estimate of $60.63 billion for the current quarter indicates a year-over-year change of +14.7%. Estimates of $243.6 billion and $277.33 billion for the current and next fiscal years show changes of +15% and +13.9%, respectively.
Last reported results and surprise history
Microsoft reported revenue of $62.02 billion in the latest quarter, representing a +17.6% year-over-year change. EPS of $2.93 for the same period compared to $2.32 a year ago.
Compared to the Zacks Consensus Estimate of $61.03 billion, the reported revenue represents a +1.62% surprise. Earnings per share surprise was +6.16%.
The company has beaten consensus EPS estimates in each of the last four quarters. The company beat consensus revenue estimates every time during that period.
Value
Without considering the stock value, no investment decision can be effective. In predicting a stock’s future price performance, it is critical to determine whether its current price correctly reflects the intrinsic value of the company’s underlying business and growth prospects.
Comparing the current value of a company’s valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), to its historical value helps determine whether its stock is fairly valued, overvalued or undervalued, while the comparison of the company in relation to other companies according to these parameters gives a good sense of how reasonable its share price is.
The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to both traditional and unconventional valuation metrics to rank stocks from A to F (An is better than B; B is better than C; and so on), is quite a help identify whether a stock is overvalued, correctly valued or temporarily undervalued.
Microsoft received a D grade on this front, indicating that it trades at a premium to its competitors. Click here to see the values of some of the valuation metrics that led to this rating.
Conclusion
The facts discussed here and much other information on Zacks.com may help determine whether the market buzz about Microsoft is worth paying attention to. However, its Zacks Rank #2 does suggest that it could outperform the broader market in the near term.
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