Why Microsoft Stock Popped on Friday

what happened

shares of microsoft (MSFT 2.76%) It was up 2.4% by 11:25 am ET on Friday. three Determined by another analyst lower the price target Above tech giant Ahead of the earnings report scheduled for Tuesday.

Tic-tac-toe, three in a row: Cowen & Co., Evercore ISI, and city ​​group As ratings watcher The Fly reported today, all companies have lowered their price targets on Microsoft stock. Indeed, all three bankers continue to recommend buying his Microsoft stock before the earnings release (which is probably why the stock is soaring today).

But here comes the very interesting part. Each of these bankers set a new target price for Microsoft at $280.

So what

Why is $280 a magic number for Microsoft? Why do all three analysts believe that Microsoft’s stock will rise exactly 18% over the next 12 months?

The reasons are different. For example, Cowen believes that growth in Microsoft’s Azure cloud computing division slowed in the second quarter, but as StreetInsider reports, the division still sees him grow by as much as 33% or 34%. I believe thatCowen also thinks other analysts may Risk exaggeration To sell Microsoft Office.

announced by Microsoft laying off 10,000 employees is another matter. Cowen estimates that the retirement benefits associated with the restructuring will deduct about $0.10 per his share from Microsoft’s earnings this year.

Meanwhile, Evercore sees the layoffs as evidence that Microsoft can “dynamically adjust” input costs “to maintain EPS and free cash flow,” The Fly said. If Microsoft can cut costs to maintain profits in the face of a recession, that’s why the stock could end up higher than it currently costs.

As for Citi, the megabank agrees that an IT recession has arrived, and that this will likely impact revenue growth for both Azure and Office. Citi, on the other hand, believes Microsoft’s problems are no worse than those facing its tech peers. All in all, this megabanker can’t ignore the fact that Microsoft’s valuation is “at multi-year lows against the S&P.” So even if Citi lowers its price target, he would only lower it by $2 from $282 to $280 per share.

So

But how exactly do Comparison with Microsoft stock valuation S&P? S&P 500 Microsoft’s stock costs more than 25 times more, but is trading at 20.5 times its earnings this year. It’s actually the opposite of a discount.

But is Microsoft worth trading at such a high premium to the S&P 500?

I think there is no dispute that Microsoft is an above average quality company. Still, in an apples-to-apples comparison, Microsoft’s projected long-term growth rate is only 11.3%, compared to 11.8% for the S&P as a whole. Also, Microsoft pays his 1.2% dividend, versus 1.9% for the average S&P 500 stock.

But when Microsoft grows slower and pays less in dividends than others, it’s hard to defend a valuation nearly 20% higher than others.Admittedly, 25x return may not be look Like a price too high to pay for a tech leader like Microsoft, especially not in the context of some tech stock valuations seen during the pandemic.

But looks can be deceiving.