As discussed earlier this month, Microsoft (NASDAQ:MSFT) stock set the world on fire with its operating performance during the July-to-September fiscal quarter. This sparked a rally, but concerns are rising about future returns. Some think the upside is already baked into its valuation.
Hence, shares face the prospect of limited upside, coupled with downside risk if future results fall short of high expectations. As I’ll detail below, a closer look at the situation suggests shares are not at risk of topping out, and another year of strong performance awaits.
A ‘Magnificent Top’ for MSFT Stock? Not So Fast
Based on recent price action with Microsoft, clearly more investors are bullish than bearish on the stock. As the market rises, more contrarians believe shares are headed in a different direction.
On the surface, I can see why a growing number of investors, analysts, and commentators are leaning bearish on MSFT stock. Macro uncertainties, such as high inflation and the risk of a recession, continue to pose a threat to the economy and the stock market. There are also rising concerns that MSFT and other so-called “Magnificent Seven” stocks are amid a bubble, and at risk of an epic crash if said bubble pops or deflates.
Alongside these reasons, valuation for MSFT stock may appear elevated to many. Trading for 33 times earnings, Microsoft currently trades at a big premium to its key rivals among the mega-cap tech names. To some, this valuation premium may even seem to be the product of excessive hope/hype about Microsoft’s future growth.
Yet while some may be arguing a “magnificent top” is happening now with Microsoft, I say, “not so fast.”
Why Shares Could Stay in Winning Mode During 2024
In a nutshell, here’s why MSFT stock may stay a winner in the coming year. Like I discussed recently, Microsoft is continuing in its efforts to monetize the artificial intelligence technology acquired through its partnership with OpenAI.
The integration of AI functionality into its various products and services played a big part in its strong results last quarter. As adoption of AI technology by businesses keeps rising, this trend (AI functionality driving increased demand) is likely to continue. Meanwhile, demand for Microsoft’s PC and gaming offerings, hit hard by the 2022 tech slowdown, and benefiting less from the AI megatrend, appear to be normalizing.
Revenue for Microsoft’s More Personal Computing unit (which includes the company’s Xbox gaming business) reported 3% year-over-year growth last quarter. Growth for this segment could continue to bounce back, giving a further lift to future overall results. With both these favorable factors in play, Microsoft is likely to continue delivering strong quarterly results over the next twelve months.
Continued growth will help Microsoft stock not only sustain its current valuation, but drive further gains for shares. While MSFT (up 54.3% year-to-date) may not make similar gains next year, additional medium-term runway remains.
The Verdict
For the current fiscal year (ending June 2024), sell-side analysts expect Microsoft’s earnings to rise by 16%. During the next fiscal year, forecasts on average call for similarly-sized growth (around 15.1%). During FY2026, year-over-year earnings growth could keep accelerating, towards 20%.
Merely meeting these expectations may be enough for MSFT to deliver solid gains next calendar year. Handily beating them could mean another banner year for the stock. As seen from the longer-term earnings forecast, shares may be well-positioned to stay in winning mode not only in 2024, but in 2025 and beyond.
The contrarian view could prove correct with other tech situations. However, chances are following the crowd will prove to be the wiser move here with MSFT stock. Whether now, or on the next round of weakness, feel free to enter or add to a position.
MSFT stock earns an A rating in Portfolio Grader.
— Louis Navellier and the Investor Place Research Staff
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Source: Investor Place