Microsoft (NASDAQ:MSFT) stock has been one of the biggest winners so far this year. In fact, shares are up nearly 37% year-to-date, and more than 55% from their March selloff lows. But, that’s no surprise.
Why?
Well, firstly, the novel coronavirus has wound up being a near-term tailwind for the company. And, secondly, the pandemic has accelerated cloud computing megatrends already in motion before the outbreak.
Sure, you may be thinking shares are topping out. That is to say, today’s prices (near all-time highs) isn’t the best entry point.
Yet, there’s no reason for concern with MSFT stock at today’s prices.
How so? Pandemic tailwinds will continue to drive near-term results, and the cloud megatrend provides long-term runway. To top it all off, the company’s deep economic moat and strong balance sheet make this a high quality stock for both agressive and conservative investors.
Put it all together, and there’s good reason to make this a core holding. Let me explain.
Pandemic Tailwinds Continue for MSFT Stock
Many industries have been hit hard by the pandemic. But for big tech, the outbreak has wound up being a tailwind. This is especially the case for Microsoft, which is “crushing it” thanks to the “stay-at-home economy.”
What do I mean? With millions still working at home due to social distancing, demand for the company’s platforms are stronger than ever. As a result, quarterly results have been nothing short of blockbuster as of late.
For the quarter ending June 30, sales surged 13% from the prior year’s quarter. The main drivers? Microsoft’s Azure (up 47%) and Dynamics 365 (up 38%) cloud services. But, these strong results aren’t a one-and-done event. In other words, don’t expect this near-term strength to cool down.
Even once the pandemic is fully in the rearview mirror, the company’s long-term catalyst (cloud megatrends) will remain in motion.
Cloud Computing Megatrend Provides Long-Term Runway
Moreover, as I mentioned above, it’s the cloud that’s driving Microsoft’s strong results as of late. Pandemic tailwinds have accelerated the shift to cloud computing. And don’t expect this megatrend to take a breather anytime soon.
With cloud revenues continuing to grow, expect above-average results out of the company over the next few years.
However, organic growth isn’t the only factor that could drive Microsoft shares higher. With a strong balance sheet (more below), the company has plenty of room to make game-changing acquisitions.
One that’s been discussed has been the potential acquisition of TikTok. Buying this video sharing app, which is surging in popularity, would expand this company’s reach in an area it has less exposure (social media).
But, if the company winds up passing on TikTok, it may find acquisition opportunity closer to its home turf. There’s ample opportunity for the software giant to grow its enterprise applications business. Bolt-on acquisitions in this space would have great synergy with Office 365, Teams, and Windows.
In short, there are still plenty of ways for Microsoft to continue moving the needle. However, besides providing the fuel for growth, the company’s high quality fundamentals are another reason why this stock should be a core holding.
High Quality and a Reasonable Valuation
There’s no denying the strength of Microsoft’s fundamentals. Not only its large cash position (nearly $136.5 billion in cash and short-term investments), but the company’s high operating margins and free cash flow as well.
That said, this strength not only provides the fuel to sustain current levels of growth. It also makes this a quality “blue-chip” level stock; In other words, a great opportunity for conservative investors.
Additionally, regarding valuation, I know many may think the current forward price-earnings ratio (P/E) multiple (32.9) is a bit rich. A 33-times multiple is by no means “cheap.” Yet, it’s all relative. Sometimes you have to pay up for quality, and that’s the case here. But also, with analyst projections calling for double-digit earnings growth in the next few years, this multiple is more than warranted.
In short, don’t split hairs over valuation. It’s reasonable given the company’s underlying quality and prospects. In terms of downside risk, though, the strong fundamentals make this a growth stock stable enough for conservative investors.
Put It All Together, and MSFT Stock Remains a Winner
Collectively, Microsoft offers you the best of all worlds. Pandemic tailwinds provide near-term growth, the cloud megatrend provides long-term runway and strong fundamentals — coupled with a reasonable valuation — make this a high-quality, stable stock with growth potential.
Put it all together, and this remains a great core holding. And even as shares trade near all-time highs, MSFT stock remains a buy.
— Matt McCall
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Source: Investor Place