Microsoft Corp. (MSFT) and F5 Inc. (FFIV): Buy or Hold?

The demand for Artificial Intelligence (AI) is steadily increasing across diverse industries and sectors. As businesses recognize the immense potential of AI in driving innovation and efficiency, the demand for AI technologies and solutions is on the rise.

Given the current trend, it could be an opportune time to load up the shares of Microsoft Corporation (MSFT) and F5, Inc. (FFIV), considering their robust fundamentals and innovative solutions centered around AI.

The increasing demand for cloud software, business intelligence software, and other types of software is driven by businesses' growing need to undergo digital transformation. These software solutions enable companies to achieve data privacy and security objectives by providing convenient and rapid access to unstructured data obtained through data analytics.

According to Gartner Inc. (IT), software spending is expected to grow 13.5% year-over-year to $911.66 billion in 2023 and further expand 14% year-over-year to $1.04 trillion in 2024.

On top of it, since the introduction of OpenAI’s ChatGPT last year, the AI movement has gained significant momentum. AI has been the central focus and driving force during the first half of 2023. Companies from various industries have embraced the trend, introducing generative AI-powered chatbots to assist in vacation planning, AI assistants to organize enterprise data, and AI services capable of generating images and videos.

Furthermore, the global AI software market is poised for remarkable growth, driven by the rising demand for software-based solutions and services and the rapid adoption of AI tools and solutions. Analysts predict that by 2032, the market will reach an astounding $1.09 trillion, demonstrating an impressive CAGR of 23%.

The strong growth trajectory and the widespread adoption of AI technologies across the business spectrum reflect its growing significance in driving innovation and improving various aspects of daily life and business operations.

With that being said, let us evaluate the fundamentals of the featured stocks in detail:

Microsoft Corporation (MSFT)

One of the most popular and sought-after software companies, MSFT barely requires any introduction. It develops, licenses, and supports software, services, devices, and solutions worldwide. It offers services such as Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, Skype for Business, Skype, Outlook.com, OneDrive, LinkedIn, etc.

On July 11, MSFT and KPMG announced a major global partnership expansion focused on workforce modernization, secure development, and utilization of AI solutions across industries. As part of this groundbreaking alliance, KPMG has committed to investing multibillion dollars in Microsoft Cloud and AI services within the next five years.  

By harnessing the power of Microsoft Cloud and Azure OpenAI Service capabilities, KPMG's vast global workforce of 265,000 employees will be empowered to unlock their creativity, conduct faster analysis, and dedicate more time to strategic advice. This enhanced capacity should enable the companies to better assist clients, including over 2,500 KPMG and MSFT joint clients.

On June 29, MSFT and Moody’s Corporation (MCO) unveiled a strategic partnership aimed at providing cutting-edge solutions for financial services and global knowledge workers. This collaboration will leverage Moody's strong data and analytical capabilities along with the immense power and scale of Microsoft Azure OpenAI Service.

Together, they will develop innovative offerings that elevate corporate intelligence and risk assessment insights using Microsoft AI and Moody's proprietary data, analytics, and research as the foundation.

MSFT’s trailing-12-month net income margin and ROCE of 34.15% and 38.82% are significantly higher than the 2.01% and 0.50% industry averages, respectively. Also, the stock’s trailing-12-month EBIT margin of 41.77% is 832.6% higher than the industry average of 4.48%.

MSFT’s total revenue increased 8.3% year-over-year to $56.19 billion in the fourth quarter (ended June 30, 2023), while its operating income rose 18.1% from the year-ago value to $24.25 billion.

The company’s net income and EPS grew 19.9% and 20.6% from the prior-year quarter to $20.08 billion and $2.69, respectively. In addition, its comprehensive income amounted to $19.38 billion, up 33.3% from the year-ago value.

The consensus EPS estimate of $2.64 for the first quarter of fiscal 2024 (ending September 30, 2023) represents a 12.4% improvement year-over-year. The consensus revenue estimate of $54.51 billion for the ongoing quarter reflects an 8.8% increase from the same period last year. The company has an excellent earnings surprise history, surpassing the EPS estimates in each of the trailing four quarters.

Additionally, MSFT’s revenue and EBIT have grown at CAGRs of 14% and 18.7% over the past three years, respectively. Likewise, its EPS and net income have increased at CAGRs of 18.9% and 17.8% over the same period, respectively.

MSFT’s shares have gained 48.1% over the past nine months to close the last trading session at $327.78.

MSFT’s POWR Ratings reflect this robust outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has an A grade for Sentiment and a B for Stability and Quality. In the 49-stock Software – Business industry, it is ranked #13. Click here to see MSFT’s ratings for Growth, Value, and Momentum. 

F5, Inc. (FFIV)

FFIV provides multi-cloud application security and delivery solutions, which enable its customers to develop, deploy, operate, secure, and govern applications in any architecture, from on-premises to the public cloud. The company also provides a range of professional services, including consulting, training, installation, maintenance, and other technical support services.

On April 4, FFIV introduced new security capabilities that provide comprehensive protection and control over apps and APIs across on-premises, cloud, and edge locations. The enhancements include advanced machine learning features for API endpoint discovery, anomaly detection, telemetry, and behavioral analysis.

This allows organizations to ensure secure experiences for users and maintain their trust in today's digital landscape. Protecting APIs, the building blocks of modern web and mobile experiences is crucial for securing digital services effectively.

On March 6, FFIV partnered with Visa Inc. (V), the global leader in digital payments, to enhance customer experiences by streamlining login processes securely for merchants. Through the collaboration, merchants can now offer their customers a seamless and secure shopping experience tailored to their needs.

F5 Distributed Cloud Authentication Intelligence leverages AI and behavior analytics to identify and securely recognize returning customers, eliminating the need for username and password logins. This enables customer personalization from the start of their journey and streamlines the guest checkout process, reducing inefficiencies.

The stock’s trailing-12-month net income margin and ROTC of 11.84% and 9.98% are 488.6% and 368.7% higher than the 2.01% and 2.13% industry averages, respectively. In addition, its trailing-12-month EBIT margin of 16.88% is 276.9% higher than the industry average of 4.48%.

For the third quarter, which ended on June 30, 2023, FFIV’s total revenues increased 4.2% year-over-year to $702.64 million, while its gross profit rose 3.2% from the year-ago value to $560.96 million.

The company’s non-GAAP net income and non-GAAP EPS amounted to $193.65 million and $3.21, up 24.8% and 24.9% from the prior-year quarter, respectively. Also, its non-GAAP operating profit improved by 20.1% from the year-ago value to $233 million.

Street expects FFIV’s EPS for the fiscal fourth quarter (ending September 30, 2023) to increase 22.4% year-over-year to $3.22. While its revenue for the same period is expected to improve marginally year-over-year to $702.42 million. Moreover, the company surpassed the EPS estimates in each of the trailing four quarters and revenue estimates in three of the trailing four quarters, which is impressive.

FFIV’s revenue has grown at a CAGR of 6.5% and 5.6% over the past three and five years, respectively. While its EBITDA has improved at a CAGR of 3.4% over the past three years.

Over the past three months, the stock has gained 21.6% to close the last trading session at $159.49.

FFIV’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.

It has an A grade for Quality and a B for Growth and Value. Within the same industry, it is ranked first. Click here to see FFIV’s ratings for Momentum, Stability, and Sentiment.

43 Year Investment Pro Shares Top Picks

Steve Reitmeister is best known for his timely market outlooks & unique trading plans to stay on the right side of the market action. Click below to get his latest insights…  

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MSFT shares were trading at $329.01 per share on Monday afternoon, up $1.23 (+0.38%). Year-to-date, MSFT has gained 37.83%, versus a 18.49% rise in the benchmark S&P 500 index during the same period.

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