Shares of tech giants Microsoft (NASDAQ: MSFT) and Apple (NASDAQ: AAPL) were down on Thursday. Microsoft beat revenue and profit estimates when the results were released on Wednesday night, but that wasn’t enough to push the stock higher. Meanwhile, an analyst has warned investors to avoid Apple stocks ahead of his report next week.
Strong profits are not enough for Microsoft
The pandemic continues to do more than hurt Microsoft’s business. Fourth-quarter revenue of $ 38 billion was up 13% year-over-year and $ 1.48 billion ahead of analyst estimates. The intelligent cloud segment, which is home to the company’s Azure cloud platform, increased revenue by 17%. The more personal segment of computing, which includes Windows, Surface hardware and games, saw revenue growth of 14%.
Earnings per share were $ 1.46, up 7% year-over-year on an adjusted basis and $ 0.09 better than analysts expected. Microsoft incurred extraordinary costs during the quarter, particularly a charge of $ 450 million related to the permanent closure of its physical stores.
Gaming and surface business was particularly strong, not surprisingly given home orders that were in effect for part of Microsoft’s quarter. Xbox content and services revenue climbed 65%, and Surface revenue grew 28%.
Despite the earnings beat, Microsoft’s stock was down about 1.8% on Thursday night. The company guided for first-quarter productivity and business process revenue between $ 11.65 billion and $ 11.9 billion, slightly below analyst estimates. The orientations for its other segments were in line with expectations.
While forecasts may be part of the reason Microsoft’s stock fell on Thursday, valuation may also play a role. Microsoft shares have surged this year despite the pandemic, up more than 30%. The stock is trading at a price to free cash flow ratio of around 37, the highest since the aftermath of the dot-com bubble in the early 2000s.
The pandemic hasn’t derailed Microsoft so far, but a long recession would almost certainly hurt some segments of the business. Business customers who cut IT spending, lay off employees, or fail outright, would put pressure on Microsoft’s sales. PC demand has been strong in recent months, due to the increase in homeworking, but this trend is unlikely to last unless the economy stages a rapid recovery.
With Microsoft shares nearing their all-time highs, investors may be overlooking the risks the company faces.
Apple stock analyst warns
Apple shares were also down Thursday, down 1.6% by late morning. One of the reasons for the decline: Goldman Sachs called the share price “unsustainable” after a strong rally this year.
Goldman advised investors to avoid Apple stocks, predicting earnings to be well below analysts’ expectations. Goldman expects profits for calendar year 2021 to be 16% lower than analysts’ estimates, due to slower unit sales growth and average selling prices.
Apple is expected to launch iPhones with 5G technology later this year, although the jury is still out on the high demand for expensive new gadgets in today’s economic environment. Goldman doesn’t expect Apple to provide any advice when it releases its latest results. While Goldman is pessimistic about the stock, he raised his price target from $ 263 to $ 299.
Like Microsoft, Apple is widely valued despite many of the uncertainties the company faces. The price / free cash flow ratio is around 26, the highest in at least a decade. Apple’s growth prospects are almost certainly worse today than they were 10 years ago.
Apple will release its third quarter tax results on July 30 after the market closes.