Microsoft (MSFT) Q2 FY6/24 Earnings Review (no paywall)

Summary

• Microsoft's Q2 earnings were strong, with revenue growth of 18% and improved cashflow margins.
• RPO growth is slower than TTM revenue growth, indicating a potential risk of revenue slowing.
• The stock may face short-term challenges but we believe it can perform well in a flat or upward market.

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Talking Heads Gonna Talk

by Alex King

I don’t know what was or will be said on CNBC and elsewhere about Microsoft’s Q2 earnings that printed yesterday after the close, because I don’t watch CNBC and I don’t read Wall Street sellside analysis. On account of it being more narrative than reality. So whether Talking Head A or B gets themselves all bent out of shape about division X or Y of Microsoft vs. someone’s expectations, I don’t know.

But I DO know that this was another superb quarter for the Big Dog. Revenue growth accelerated - +18% in the quarter, cashflow margins ticked up, and although there is now only a smaller nation-state’s worth of money on the balance sheet, that’s because they just ponied up $70bn or so to pay for Activision, so that’s going to drain the coffers of anyone for a little while.

The stock may take a hit in the short term with FOMC and the general run-up in January, but if this market stays flat or moves up, so too will Microsoft in my opinion.

Numbers, valuation, stock chart and rating follow.

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Fundamentals

The one negative here to my eye is that RPO growth is now slower than TTM revenue growth. That means the order book isn’t growing as quickly as they are recognizing revenue out of that order book. And that means that maybe there is some revenue slowing underneath the waterline. That won’t be picked up in the stock coverage today (it’s too boring a thing to warrant attention) but it is a slowly-building risk that one needs to be alive to if one is or is thinking of becoming a MSFT shareholder.

Valuation

Not cheap, not expensive in my opinion. By way of comparison, a boring defense prime will cost you around 22x TTM UFCF right now. And they aren’t growing at +18% this quarter.

Technicals

If MSFT stock is finishing the bull run it started in late 2018, which is our base case outlook, then we expect the stock to hit major resistance anywhere from here ($400 and change) to $435 before a big selloff.

If on the other hand, as we believe may be the case, MSFT is in the middle of a bull run that began in March 2020, we think the stock could run to $570 before it catches RSV and keels over.

At a minimum we can say that in the former case - the base case - MSFT has already beaten typical Wave 5 levels. If MSFT > 435 and keeps going, we will be looking to that bull case price target.

Pay attention to this chart, folks. MSFT accounts for 9% of the Invesco QQQ ETF, which tracks the Nasdaq-100® Index. Whichever direction MSFT takes in the coming weeks, the broader market might move in the same direction. You can open a full page version of this chart, here.

Rating: Hold

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Cestrian Capital Research, Inc - 01 Feb 2024.