Investors' fears about escalating inflation and a slowing economy led big tech stocks to plunge this year. Software and cloud services behemoth Microsoft Corporation (MSFT) is down 27.3% year-to-date and 13.4% over the past month.

MSFT fell short of the consensus earnings and revenue estimates in the last reported quarter. Its EPS was 1.6% lower than the consensus estimate of $9.36, and its revenue was 0.15% lower than expected. The revenue shortfall was primarily attributed to rising foreign exchange rates.

However, the company expects double-digit growth in revenue and operating income in fiscal 2023. Moreover, of the 30 Wall Street analysts that rated MSFT, 28 rated it Buy, and two rated it Hold. The 12-month median price target of $327.41 indicates a 33.8% potential upside. The price targets range from a low of $275.00 to a high of $411.00.

Also, MSFT offers a passive income by paying consistent dividends. The company paid a quarterly dividend of $0.62 per share on September 8, 2022. Its four-year average dividend yield is 1.08%, and its forward annual dividend of $2.48 yields 1.01%. The company has increased its dividend for 17 consecutive years. Its dividend has increased at a CAGR of 10.5% over the last three years.

Here's what could shape MSFT's performance in the near term:

Latest development

Last month, Barclays PLC (BCS) and MSFT announced that Barclays had chosen Microsoft Teams as its preferred collaboration platform, enabling collaboration for over 120,000 colleagues and service partners in key locations worldwide.

Under the terms of the agreement, Barclays will streamline its existing communications and collaboration solutions, with Teams replacing several point solutions previously used throughout the company.

In July, Alaska Air Group Inc. (ALK) and MSFT signed a Memorandum of Understanding (MOU) to collaborate on expanding the market for sustainable aviation fuels (SAF) to include fuels derived from recaptured CO2 and renewable energy, as well as working toward the first commercial demonstration flight powered by Twelve's E-Jet in the United States.

Robust Financials

During the fourth quarter ended June 30, 2022, MSFT's total revenue increased 12.4% year-over-year to $51.87 billion. Its operating income increased 7.5% year-over-year to $20.53 billion. The company's non-GAAP net income grew 14.5% from the year-ago value to $69.45 billion, while its non-GAAP EPS grew 16% from the prior-year quarter to $9.21.

Strong Profitability

MSFT's trailing-12-months net income margin of 36.7% is 763.6% higher than the industry average of 4.3%. Also, its ROC, EBITDA margin, and ROA are 460.7%, 280.7%, and 626.7% higher than the respective industry averages. Furthermore, its CAPEX/Sales of 12.1% is 407.1% higher than the industry average of 2.4%.

Impressive Growth Prospects

Street expects MSFT's revenues and EPS to rise 11.4% and 10% year-over-year to $220.87 billion and $10.13, respectively, in fiscal 2023. In addition, MSFT's EPS is expected to rise at a 15.4% CAGR over the next five years. Moreover, the company has an impressive earnings surprise history, as it topped Street EPS estimates in three of the trailing four quarters.

POWR Ratings Reflect Solid Prospects

MSFT has an overall grade of B, equating to a Buy rating in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. MSFT has a B grade for Quality and Stability. MSFT's strong profitability is consistent with the Quality grade. In addition, the stock’s beta of 0.94 is in sync with the Stability grade.

Of the 54 stocks in the D-rated Software – Business industry, MSFT is ranked #9.

Beyond what I stated above, we have graded MSFT for Sentiment, Growth, Value, and Momentum. Get all MSFT ratings here.

Bottom Line

Despite the macroeconomic uncertainty and fluctuating exchange rates, MSFT anticipates double-digit growth in operating income and revenue in fiscal 2023. Furthermore, various strategic initiatives and collaborations are expected to improve its operational performance.

Given the stock's higher-than-industry profitability and solid growth prospects, we think the stock could be an ideal long-term investment.

How Does Microsoft Corporation (MSFT) Stack Up Against its Peers?

MSFT has an overall POWR Rating of B, which equates to a Buy rating.  Check out this other stock within the same industry with A (Strong Buy) ratings: VMware Inc. (VMW).

MSFT shares were trading at $244.71 per share on Monday afternoon, down $0.03 (-0.01%). Year-to-date, MSFT has declined -26.76%, versus a -17.76% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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