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Is Microsoft's share price good value after selloff?

Microsoft’s [MSFT] share price got off to an inauspicious start to 2022 after getting caught up in the wider tech selloff. Down 7.8% so far this year (as of Friday 14 January’s close), the double whammy of likely multiple interest rate hikes and inflation that sent tremors through the market did the stock no favours last week.

Microsoft's share price fell 1.4% during the week, although Friday the stock managed to climb 1.77% to close at $310.2. Both the S&P 500 and Nasdaq fell a respective 0.3% and 1.2% last week.

Yet, analysts are bullish about Microsoft’s share price this year, especially the tech giant’s cloud computing prospects. But is Microsoft’s share price too expensive at its current levels? Or does the firm’s size, reliability, and investment in innovation, make the current dip a chance for traders to fill their boots with a top-quality stock?

 

 

 

What’s happening with Microsoft’s share price?

Microsoft’s share price was a top-gainer over the pandemic era. A combination of strong earnings and double-digit revenue growth bolstered the stock to a massive 51.21% gain last year. Shareholders will be hoping that the recent turbulence in Microsoft's share price doesn’t interrupt a longer-term growth story.

51.21%

Microsoft's share price gain in 2021

 


What investors should watch out for in 2022:

Cloud revenue keeps growing

As a cloud provider, Microsoft’s Azure 20% market share is second only to Amazon’s [AMZN] AWS. Revenue from Azure and other cloud services segments has experienced consistent growth, surging 50% in the third quarter. And with Wedbush analysts expecting the cloud market to be worth $1trn by 2030, this is a business that could continue to grow.

A major advantage for Microsoft is its position as an incumbent tech supplier in many enterprises. According to a Morgan Stanley survey of chief information officers, out of any tech company - including Amazon - Microsoft is expected to snap up the biggest increase in budget spend over the next three years, as reported by Bloomberg.

Dan Ives at Wedbush said that large cloud deals were up 50% going into 2022. Ives has a $375 price target on Microsoft to go with his Outperform rating. The analyst has said that Microsoft could steal some cloud market share from AWS.

However, a straight comparison between Microsoft’s Azure and AWS is difficult. Microsoft reports its Azure revenue in the same bucket as money made from its other cloud products like Office 365. Investors may do well focusing on how Microsoft is growing this side of the business - upcoming earnings on 25 January will be a great place to start.

 

Standalone Teams launch

Microsoft Team’s was a pandemic-success story. The workplace communication tool that comes bundled with Office 365 came into its own in the era of working from home. In October 2020, Microsoft reported that it had 115m daily users on the platform, a 50% surge year-on-year, and by April 2021 that figure had hit 145m daily users. By July last year, Microsoft reported 250m monthly active users.

Now Microsoft has launched a standalone version of the software, Microsoft Teams Essentials. Competitively priced at $4 per person, per month, the product is likely to sap both Slack and Zoom’s [ZM] market share.

“We know how difficult the past 20 months have been for small businesses. They’ve had to demonstrate extreme flexibility to adapt, often with limited access to tools and technology,” said Jared Spataro, corporate vice president of Modern Work at Microsoft. “Teams Essentials is built specifically to meet the unique needs of small businesses, enabling them to thrive in this new era of work.”

While the need for such a product might not be as red hot as people return to the office, the expectation is that hybrid working is here to stay. It will be interesting to see how Teams performs as the nature of office work continues to change.

 

Microsoft’s second biggest acquisition

In December, European regulators gave their blessing for Microsoft’s $16bn acquisition of Nuance Communications to go ahead. The deal had already cleared regulatory hurdles in the US and Australia, and is Microsoft’s second biggest purchase after picking up LinkedIn for $26.2bn in 2016.

$16billion

Microsoft's deal to buy Nuance is its second-largest purchase

 

Nuance is a US-based maker of speech recognition and AI software that’s used for transcription in health care and customer engagement.

The firm’s move to buy Nuance has been officially approved by European regulators, which is likely to facilitate the firm’s development of AI, and would expand Microsoft’s addressable market into the healthcare tech industry.

 

Where next for Microsoft’s share price

Microsoft’s share price trades at a 37.45 forward price to earnings ratio, which could put it into the overvalued bucket, especially if investors back away from tech stocks this year.

Still, it’s hard to argue with such a mature company’s ability to generate growth. For the current year, Wall Street expects Microsoft to deliver a 17.2% year-on-year revenue growth, although this is expected to slow to 14.5% next year.

Jefferies analyst Brent Thill acknowledged this likely slowdown in revenue in a note to investors earlier in January. Yet the analyst still sees potential in Microsoft after last year’s ‘massive’ outperformance, upping his price target from $375 to $400 to go with his Buy rating. Credit Suisse also has a $400 price target on Microsoft, suggesting that revenue will remain in the mid to high teens for the next five years.

Among the analysts tracking the stock on Yahoo Finance, Microsoft’s share price has a $371.23 price target - hitting this would see a 19.7% upside on Friday’s close.

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