Stock of the Week: Microsoft – Can the Rally Continue After a 35% Jump?
Great company, expensive stock. What comes next?
Here is the 23rd edition of “Stock of the Week”. You can find all the previous analyses and my articles on my main page (for an easier search, use a computer, mobile version is harder to navigate).
Here are the links to the 3 previous “Stocks of the Week” as well
This week, our spotlight is on Microsoft. The stock has recently hit a new ATH and is now trading at a notably elevated valuation. But is this momentum sustainable? And more importantly, is it still a smart time to invest? Let’s dive in and find out.
While free subscribers already benefit from a wealth of valuable content, upgrading to a paid subscription unlocks exclusive research, in-depth insights, real-time portfolio tracking, advanced stock screeners, and more giving you an edge to stay ahead of the market. Don’t miss out: subscribe now and supercharge your investing journey!
One Pager
The stock at a glance
Recent news
Layoffs. Microsoft announced layoffs of approximately 9,000 employees, about 4% of its workforce, marking its largest job cuts since 2023. Affected divisions include Xbox, sales, and marketing
AI and cloud momentum. Microsoft’s Azure Service continues to drive significant adoption with YoY growth around 30%
Energy investments. Microsoft signed a $10B deal with Brookfield to develop 10 gigawatts of renewable energy capacity by 2030, aiming to power AI data centers and meet sustainability goals
OpenAI renegotiation. Microsoft and OpenAI are renegotiating their partnership terms with a potential IPO of OpenAI
Last earnings report
For Q1 25, Microsoft delivered a robust earnings report Total revenue reached $70.1B, representing a 13% YoY increase. Operating income grew by 16% to $32B, while net income jumped 18% to $25.8B. Diluted earnings per share rose to $3.46, marking an 18% YoY increase.
Cloud remained the central growth engine. Microsoft Cloud revenue advanced 20% YoY (22% in constant currency). Azure and other cloud services were particularly strong, accelerating 33% (35% in constant currency).
Analysts’ recommendations
July, 2. DA Davidson. Buy. $500 —> $600
June, 27. BNP Paribas. Buy. $500 —> $606
June, 25. Wedbush. Buy. $515 —> $600
June, 25. Wells Fargo. Buy. $565 —> $585
June, 11. Citigroup. Buy. $540 —> $605
My analysis
Microsoft stands as one of the most exceptional companies in the world. Its revenue base is both highly diversified and largely recurring, supported by outstanding profitability and a rock-solid balance sheet. Few businesses can match the strength and resilience of Microsoft's operating model
Growth remains impressive, with revenues increasing by over 13% YoY. This momentum is primarily driven by the continued expansion of cloud services and AI-related offerings, which are becoming central pillars of the company’s long-term strategy
While the cloud segment clearly leads the charge, other divisions (such as gaming and personal computing) are less dynamic. In some cases, like video games, performance has been somewhat underwhelming. That said, these segments still offer strategic value, especially as Microsoft integrates them into its broader ecosystem, such as through cloud gaming initiatives
However, even the best companies can be overvalued. With a PE exceeding 35x, Microsoft stock is far from cheap. Although the stock could continue to rise, buying at current levels leaves little room for error. A more prudent approach would be to wait for a pullback, providing a more favorable margin of safety
Additionally, the market currently appears to be pricing in only the upside, ignoring potential downside risks. While Microsoft has demonstrated remarkable resilience, the possibility of unforeseen negative events cannot be ruled out. For cautious investors, patience and discipline may be the wisest course of action
Technical analysis
I have defined three buying zones that I find interesting for long-term investments during pullbacks. While these zones may not be reached, I am prepared for a market (or stock) consolidation to seize long-term opportunities. For me, this approach offers a better risk/reward ratio.
Of course, this is just my opinion, and I am sharing it with you, but each investor should decide on their own investment style. With that said, here are my three buying zones for Microsoft.
Buying zone 1. $420
Buying zone 2. $350 (my favorite one)
Buying zone 3. $300
If you enjoyed this article and like Quality Stocks, please give it a like and spread the word!
Used source: Marketscreener.com. Affiliate link just here