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    Hernan Diaz
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    Microsoft is the largest software company that develops software and hardware like Xbox and Surface. It generates revenue from cloud computing services like Azure, productivity software like Office, and operating systems like Windows. Microsoft reported strong first quarter 2020 results with 14% revenue growth driven by its cloud and productivity segments. The company raised its full year 2020 earnings forecast and expects double-digit revenue and profit growth. While Microsoft faces competition, its shares are undervalued and analysts maintain a buy rating with a $180 price target for nearly 22% returns.

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    Microsoft is the largest software company that develops software and hardware like Xbox and Surface. It generates revenue from cloud computing services like Azure, productivity software like Office, and operating systems like Windows. Microsoft reported strong first quarter 2020 results with 14% revenue growth driven by its cloud and productivity segments. The company raised its full year 2020 earnings forecast and expects double-digit revenue and profit growth. While Microsoft faces competition, its shares are undervalued and analysts maintain a buy rating with a $180 price target for nearly 22% returns.

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    30 views2 pages

    Microsoft (MSFT) : Company Description

    Uploaded by

    Hernan Diaz
    Microsoft is the largest software company that develops software and hardware like Xbox and Surface. It generates revenue from cloud computing services like Azure, productivity software like Office, and operating systems like Windows. Microsoft reported strong first quarter 2020 results with 14% revenue growth driven by its cloud and productivity segments. The company raised its full year 2020 earnings forecast and expects double-digit revenue and profit growth. While Microsoft faces competition, its shares are undervalued and analysts maintain a buy rating with a $180 price target for nearly 22% returns.

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    Microsoft (MSFT)

    December 5, 2019

    COMPANY DESCRIPTION

    Microsoft Corp. (MSFT) is the largest manufacturer of software. It develops and sells software
    products for a wide variety of computing environments in consumer and business markets.
    Hardware products include the Xbox video game console and Surface laptops. Revenue sources
    in fiscal 2019 included Productivity & Business Processes, 33%; Intelligent Cloud, 31%; More
    Personal Computing, 36%. R&D, was 13% of 2019 revenues.

    INVESTMENT THESIS

    Cloud computing  is thought to be the future of business and Microsoft’s Azure is a top service
    that is benefiting from the trend toward combining traditional software with cloud computing
    (hybrid) first and later the shift toward individual use of cloud computing. Meanwhile, Microsoft
    has a near monopoly in both in software applications (Microsoft Office) and operating systems
    (Windows 10). We expect these businesses to be used to fund other of the company’s growth
    initiatives. Finally, the shift from software purchases to software licensing is also benefiting
    Microsoft.

    RECENT DEVELOPMENTS

    Microsoft reported first-quarter results for fiscal 2020 (ended September 30) after the market
    close on October 23. Operating Earnings topped the consensus forecast by $0.15 and revenue
    surpassed the consensus by $837 million.
    First-quarter revenue increased 14% year-over-year to $33 billion. Foreign exchange headwinds
    trimmed nearly 200 basis points from revenue growth. The Intelligent Cloud and Productivity
    and Business Processes segments along with a small contribution from More Personal
    Computing drove strong revenue growth. Azure cloud services had another strong quarter with
    63% constant currency growth. The gross margin widened to 69% from 66%, reflecting an
    improved sales mix shift to higher margin businesses. Reported operating income rose 27% to
    approximately $13 billion. The operating margin expanded by 4 percentage points, to 38%,
    driven by expanding gross margins and carefully managed expenses. Adjusted diluted earnings
    increased 21% to $1.38 per share.

    EARNINGS & GROWTH ANALYSIS

    We are raising our FY20 operating EPS to $5.60 from $5.30 and our FY21 forecast by a nickel
    to $5.90. During the conference call, management maintained its forecast for double-digit
    revenue and operating income growth in FY20. Management also increased its outlook on full
    year operating margin to modest expansion from a previous guidance of unchanged.
    RISKS

    Microsoft faces fierce competition from Google, among many others, in many areas, including
    internet search, operating system software and internet-based software applications. This
    competition could reduce the dominance of Microsoft's operating system and Office applications.

    VALUATION

    Microsoft shares have gained 49% year-to-date including the dividend, compared to a 25%
    increase for the S&P 500 and a 33% gain for the S&P Information Technology Index. Given the
    company’s strong growth prospects, we think the shares are undervalued.  As such, we are
    maintaining our BUY-rating and $180 target price. Our target, if achieved, offers investors the
    prospect of a nerly 22% return, including its dividend.

    Microsoft (MSFT)

    Current Price: $149.85

    Target Price: $180

    Current Valuation: 26.7 times FY20 EPS

    Target Valuation: 32.1 times FY20 EPS

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