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Saturday, January 28, 2023

Microsoft Stock Is a Solid Bet as the Market Gets Its Legs Back

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[Editor’s note: “Microsoft Stock Remains a Safe Buy in Today’s Uncertain Market” was originally published on April 12. It is regularly updated to include the most relevant information.]

Microsoft Stock Remains a Safe Buy as Markets Bounce Back

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Microsoft (NASDAQ:MSFT) has shown great strength in light of the novel coronavirus. Growth in the company’s cloud businesses remains in motion. If there ever was a time for cloud computing, now’s likely the moment. This is a strong catalyst, as Microsoft stock has made new highs in recent weeks.

But, as markets turn negative again, what’s next? Even if a second wave hits, shares could remain resilient if markets continue to head lower.

Despite the recent run-up, valuation may still be reasonable, considering the company’s underlying strength. Even if a “work-from-home” economy extends through the summer, this could mean continued tailwinds for Microsoft’s remote-friendly applications.

These include Skype, Office 365, and now, Microsoft Teams. Speaking of Teams, the collaboration platform is growing rapidly, helping to bolster long-term growth.

Let’s dive in, and see why Microsoft is still a buy in today’s market.

Microsoft, Coronavirus and Teams

Before last week’s reversal, hard-hit stocks went parabolic as investors jumped back into high-risk sectors. This included airline, casino, and retail names. The types of bricks-and-mortar businesses threatened by coronavirus shutdowns. But, as Wall Street loses confidence in a V-shaped recovery, these recent “high-flyers” could fall back to prior prices.

Yet, with tech names like Microsoft, uncertainty may be limited.  Back in April, the company met expectations regarding earnings, citing minimal impact from the pandemic. Revenue from its Azure cloud business grew 59% from the prior year’s quarter. Office 365 revenues climbed 25%. Revenue overall grew 15%, and earnings per share jumped 23% year-over-year.

But growth across these platforms isn’t the only thing to get excited about. Microsoft Teams, a collaboration platform, continues to beat expectations. As our own Luke Lango wrote May 16, the platform saw its Daily Active User base surge 70% quarter-over-quarter. In other words, 75 million users now use the platform.

Analysts at Baird say Teams “presents a significant competitive threat” to other collaboration SaaS names, like Slack (NYSE:WORK), and Zoom Video (NASDAQ:ZM). In short, Microsoft is giving these “hot stocks” a run for their money.

What does the success of Teams mean going forward? The potential for strong results again this quarter. And while forward multiples may look rich, there could be good reason why a premium valuation is here to stay.

Despite Valuation, Microsoft Stock Could Still Head Higher

I don’t have to tell you about the strong performance of Microsoft before the selloff. Driven by growth in the company’s Azure cloud business and related platforms, shares soared from around $120 per share in April 2019, to as high as $190.70 per share in February 2020. Quite impressive, considering what it takes to move the needle for a trillion-dollar company.

When shares took a dip in March, shares became more reasonably priced. But even though the stock has pulled back after hitting a new all-time high, shares could continue to trend higher. Even  though the tech giant continues to trade at a premium valuation.

What do I mean? Analyst consensus calls for earnings to grow around 9% between Fiscal 2020 (ending June 2020) and Fiscal 2021. In other words, I wouldn’t say Microsoft is “cheap,” considering its near-term growth prospects.

The stock’s forward price-to-earnings ratio stands at 33. Compared to FAANG names like Apple (NASDAQ:AAPL), that looks pricey. Apple trades for around 27.4 times forward earnings.

However, the company’s rich multiple has done little to scare off the analyst community. Deutsche Bank’s Taylor McGinnis recently raised her price target, from $180 per share to $215 per share. Her rationale? The analyst cites Azure’s continued strong prospects. Wedbush’s Dan Ives agrees, recently saying the stock could head to prices as high as $275 per share.

In short, don’t miss the forest for the trees with Microsoft shares. The trend (cloud growth) continues to be your friend.

Don’t Expect Big Moves, But Still a Solid Buy

I wouldn’t buy into Microsoft thinking shares are going to post massive gains in the next year. But, in terms of finding a low-risk opportunity with upside, the company’s shares may be the place to be.

As seen from earnings, coronavirus has had minimal impact on Microsoft’s bottom line. With recent events serving as a tailwind, growth remains in motion. Add in the potential for Teams to gain critical mass in the next year, and the trillion-dollar tech giant continues to have runway.

Sure, valuation is not dirt cheap. But in terms of quality and low-risk, it may be worth the price. Even if markets continue to sell-off, consider adding Microsoft to your portfolio.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, he did not hold a position in any of the aforementioned securities.

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