Microsoft is stuck near 10-month low. Does Activision deal and cloud growth make it a buy?

A solid earnings report late last month allowed Microsoft (NASDAQ: MSFT) to rebound from its lowest level since last June. However, shares of the iconic software maker have had trouble sustaining upward momentum and remain just 4% above its 10-month low.

Held down in part by general concerns about interest rates and the economy, which have weighed on the broader equity market since late last year, MSFT has languished in recent months. As the company bets on strong growth in its cloud business and a pending $ 69B deal to acquire Activision Blizzard (ATVI), has the stock become a buy?

Microsoft Leans on Cloud and Gaming

Last week, Microsoft (MSFT) reported earnings that topped expectations. This was fueled by better-than-projected revenue growth, with the top line rising almost 19% from last year to reach $ 49.4B. This exceeded analysts’ consensus by $ 350B.

Cloud revenue led the expansion, with the division boasting 26% growth in the last quarter. Meanwhile, the firm targeted 47% growth for its Azure cloud computing service, part of a Wedbush Securities analyst forecast Dan Ives said would be “heard around the world.”

Shares rose in the immediate aftermath of the earnings release, climbing nearly 5% the next day and following up with another 2.5% gain the following session. However, choppy trading in the overall market has sapped the stock’s momentum. The Nasdaq plunged more than 4% last Friday – a move echoed in MSFT’s own 4% drop that session, halting its post-earnings excitement.

Meanwhile, the earnings lift only took the stock off of multi-month lows. The day before its earnings release, MSFT finished at $ 270.22 – its lowest close since late June 2021.

Overall, shares are now 19% below a 52-week high of $ 349.67 it reached late last year.

Among the overhangs facing MSFT stock is its attempt to acquire Activision (ATVI). In January, MSFT announced a deal to buy the video game maker for $ 95 per share in cash, or a total of around $ 69B. The transaction is meant to bolster MSFT’s place in the gaming market, complimenting its Xbox business.

However, investors have shown some skepticism about the transaction’s prospects. ATVI currently trades near $ 79, well below the merger’s contemplated purchase price. There are worries that regulators will look askance at any large purchases by a megacap player.

At the same time, the companies have given the deal a long gestation period, saying only that they expect to close the deal before July 2023.

Is MSFT a Buy?

Wall Street has an almost universally bullish view of Microsoft (MSFT). Of the 48 analysts surveyed by Seeking Alpha, only one has less than an optimistic take on the software maker, with a single Hold rating spoiling the cheering session.

Otherwise, 34 analysts have Strong Buy ratings, while another 13 give the stock a Buy recommendation.

Looking at quantitative measures, however, the picture gets more complicated. Seeking Alpha’s Quant Ratings view the stock as a Hold. While MSFT gets an A + for profitability and an A- for momentum, it receives a D + for growth and a D- for valuation.

To better understand the cautious view of MSFT, read a deep dive from SA contributor BeanKounter CapitalSun, which says the stock is “still not a bargain.” For a more bullish take, see why fellow SA contributor JB Meathe calls Azure “a generational opportunity.”

Leave a Comment