More Upside For MSFT Stock After An Impressive Q3?
Microsoft (NASDAQ: MSFT) has recently announced its fiscal Q3 2025 results (the fiscal year concludes in June), with both revenue and earnings surpassing expectations. The company reported $70.1 billion in revenue and earnings of $3.46 per share, compared to the consensus estimates of $68.4 billion and $3.22, respectively. Microsoft continued to benefit from rising sales of Azure cloud computing services. Furthermore, the outlook for the fourth quarter surpassed street expectations, contributing to the increase in the stock price following the earnings announcement. We believe that MSFT still has additional growth potential despite its recent gains.
Even with a 6% decline year-to-date (as of April 30th), Microsoft's (MSFT) stock performance has been a bit better than that of the broader NASDAQ index, which has dropped by 10%. We expect Microsoft will experience a relatively smaller effect from the existing tariff situation in comparison to many other technology firms—a resilience reflected in the company's positive outlook. However, if you seek an upside with a smoother experience than holding an individual stock, consider the High-Quality portfolio, which has outperformed the S&P and achieved >91% returns since its inception.
Microsoft's revenue of $70.1 billion in Q1 represented a 13% year-over-year increase. Analyzing the segments, sales in Productivity and Business Processes rose by 10% to $29.9 billion, driven by increased sales of Microsoft 365 products and LinkedIn solutions. Revenue from the Intelligent Cloud segment grew by 21% to $26.8 billion, primarily due to Azure and other cloud offerings. Finally, sales in More Personal Computing increased by 6% to $13.4 billion, driven by growth in Windows OEM and devices, along with higher gaming sales. Microsoft saw a 33% rise in revenue from Azure and cloud services. The company not only experienced higher sales but also expanded its operating margin by 110 basis points year-over-year to 45.7%. Increased revenues, combined with margin expansion, led to earnings of $3.46 per share, an 18% increase year-over-year.
Looking ahead, Microsoft anticipates its Q4 revenue to be around $73.7 billion, exceeding the consensus estimate of $72.3 billion. This projection accounts for a 34% to 35% growth in Azure, compared to the anticipated 31%.
A strong Q3 and a positive outlook were well-received by investors, resulting in a 7% surge in MSFT stock during after-hours trading. However, assessing a slightly longer timeframe, the increase in MSFT stock over the past four years has been far from steady, with annual returns being significantly more volatile than the S&P 500. The returns for the stock were 52% in 2021, -28% in 2022, 58% in 2023, and 13% in 2024.
In contrast, the Trefis High Quality (HQ) Portfolio, which includes 30 stocks, is significantly less volatile. Moreover, it has outperformed the S&P 500 comfortably over the last four years. Why is that? As a collective, HQ Portfolio stocks offered better returns with lower risk relative to the benchmark index; demonstrating less volatility, as seen in HQ Portfolio performance metrics.
Considering the current uncertain macroeconomic environment concerning tariffs and trade wars, could MSFT encounter a similar scenario as it did in 2022 and 2024 and underperform the S&P over the next 12 months, or will it experience a substantial increase? Despite its recent rise, we believe MSFT stock has further room for growth.
We estimate Microsoft's Valuation at $500 per share, indicating a potential upside of nearly 18% from its current after-hours trading price of $423. This forecast is grounded on a price-to-earnings (P/E) ratio of 39x applied to the trailing twelve-month earnings per share of $12.94. Although the current P/E ratio of 39x exceeds the stock's four-year average of 35x, we believe this elevated valuation is warranted given the anticipated earnings growth driven by increasing contributions from its Cloud business.
While MSFT stock appears to have room for more growth, it is useful to examine how Microsoft's Peers perform on important metrics. Additional valuable comparisons for companies across various industries can be found at Peer Comparisons.
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