Microsoft: Q4 Shows Double-Digit Growth Continuing Beyond FY21 (Preview)

Company Update (MSFT US) (Buy)

Summary

• MSFT finished FY21 with a strong Q4, with growth of 17% in revenues, 35% in EBIT and 42% in EPS in constant currency.

• Growth was broad-based, including double-digit growth in Office, Server Products and Windows Commercial. Azure revenues grew 45%.

• Q1 FY22 is expected to be again show double-digit growth, and MSFT believes COVID-19 has accelerated growth permanently.

• Relative to FY21, MSFT stock is at a 35.9x P/E and a 1.9% FCF Yield (lower due to one-offs), reasonable in light of its growth and resilience.

• With shares at $286.54, we expect an exit price of $421 and total return of 51% (15.3% annualized) by June 2024, in just under 3 years. Buy.

Introduction

We review our investment case on Microsoft after it released Q4 FY21 results overnight (on Tuesday, July 28). Microsoft stock was down 3.8% at one point in post-market trading, but finished up 0.2%.

We initiated our Buy rating on Microsoft on Seeking Alpha in December 2020, though it has been a longstanding holding in our portfolio…