After beating analysts’ expectations for its first quarter 2022 results, Microsoft Corporation (MSFT) last week became the world’s most valuable company. Its stock price soared to a new high of $ 332 per share, and the company’s market cap jumped to $ 2.48 trillion, slightly more than that of rival Apple, Inc. (AAPL).
The key question for Microsoft investors now is whether the tech giant can keep up the pace and post profits according to investor expectations. Microsoft’s previous reign at the top of the business rating charts in 2020 was brief. Rival Apple quickly overtook it and surpassed the $ 2 trillion mark shortly thereafter. As of this writing, Apple and Microsoft shares are stuck in a kind of dead end with roughly the same valuation of $ 2.46 trillion.
Key points to remember
- Microsoft became the world’s most valuable company on Friday, October 29, overtaking Apple in terms of market capitalization.
- To continue on its current growth path, the tech giant will need to grow its cloud services division.
- However, critics say Microsoft may be overrated compared to its peers.
The cloud’s growth engine
While other units of the company also contributed to the increase in profits, Microsoft’s recent growth spurt came in large part from the exceptional sales of its cloud division. The company benefited from the double tailwind of business transformation in enterprises and a pandemic shutdown that accelerated the company’s transition to the cloud.
Even though it was late in the game, Microsoft’s cloud division Azure captured market share from rival Amazon.com, Inc. (AMZN). In the third quarter of 2021, Microsoft held 21% of the cloud market and ranked second behind Amazon’s 32% share. The Azure division has seen successive quarters of revenue growth, culminating with a quarterly increase of 48% year-over-year in the latest earnings report.
Research firm Gartner predicts that the cloud computing market will grow 21.7 percent to $ 482 billion in 2022. Analysts trusted Microsoft’s ability to reap a substantial portion of corporate capital spending.
âWe continue to see Microsoft well positioned to capitalize on sustained secular growth in digital transformation budgets, and we remain convinced in our thesis that Microsoft Cloud is on track to generate $ 120 billion to $ 140 billion in annual revenue, probably 1 to 2 billion dollars. years ahead of our initial expectations at the time of our initiation in January, âwrote Kash Rangan, analyst at Goldman Sachs.
Bank of America analyst Brad Sills pointed to the consistent profits from the Microsoft legacy Server and Windows businesses and the significant margins of the Azure divisions, writing that âthe estimated Azure margin in the 59% – 60% rangeâ¦ demonstrates the Microsoft’s ability to capture incremental growth in the cloud, but not at the expense of these large, profitable legacy companies. “
In the short term, however, Microsoft’s cloud division could report lower than expected results. “We are seeing a slowdown in the remaining performance obligation or the growth of RPO and commercial bookings, two forward-looking measures, as driven by large Azure transactions during the period of the previous year and not a reflection of ‘a deterioration in demand,’ wrote Morningstar analyst Dan Romanoff. He gave Microsoft a wide gap and increased the target value of its shares to $ 345 from $ 325.
The problem of evaluation
While the future of his company is far from cloudy, Microsoft’s valuation is questioned by critics. The company trades at a relatively high price / earnings (P / E) ratio compared to its peers. As of this writing, Microsoft stocks have a P / E ratio of 36.85 times the previous year’s earnings. Meanwhile, Apple and Google’s parent company Alphabet Inc. (GOOGL) are trading at P / E ratios of 26.55 and 27.70, respectively, based on their 2020 earnings.
Some say these valuations are “a little foamy” given analysts’ expectations of 9% earnings growth for 2021. But others point to Microsoft’s competitive advantage and its “well-established business model” in its three business units as proof that the company still has a large avenue for growth.