Microsoft is still an attractive stock, this portfolio manager says

Stephen GroffAhead of its quarterly earnings report due next week, Microsoft Corp (NASDAQ:MSFT) has hit a new record high in trading on Friday. At over US$100, the stock is no longer cheap, but Microsoft’s successful pivot towards cloud computing services is evidence of the tech giant’s money making prowess, says portfolio manager Stephen Groff of Cambridge Global Asset Management.

Microsoft’s fourth quarter of fiscal 2018 arrives on July 19, with analysts expecting earnings per share of $1.07 on sales of $29.17 billion (all figures in US dollars).

In April, the company posted Q3 results that beat expectations at $0.95 per share on $26.82 billion in sales (versus the consensus $0.85 and $25.77 billion, respectively).

Much of that growth has been attributed to Microsoft’s transition towards cloud computing. MSFT’s Intelligent Cloud segment, which contains server products and cloud services, saw a 17.3 per cent uptick in Q3, producing $7.90 billion in revenue.

“We have made the right investment decisions and they are having an impact, increasing our overall share in an expanding market,” said Microsoft CEO Satya Nadella about its cloud computing service, Azure, during the company’s third-quarter conference call.

And while the return on the stock has been superb —MSFT has shot up 185 per cent over the last five years— investors may be thinking that the share price is now too rich.

Not really, says Groff, who thinks Microsoft is still a good buy for the long term.

“It’s not a bargain anymore — it’s 20-22x forward earnings,” Groff told BNN Bloomberg. “However, the thing to note is that the free cash flow conversion is quite high in this company. We think that they can probably compound free cash per share in the mid-teens kind of rate. That’s driven by businesses like [cloud computing service Azure] and so on.”

“They’ve really done a good job of high-grading the overall revenue quality over the past number of years,” he says. “They’re just a powerhouse. It’s just a very attractive economic model. You’re paying a fairly fair price for it but if you’ve got a long-enough time horizon, I think you’ll be okay in the stock.”

For Microsoft’s first quarter fiscal 2019, analysts are modelling MSFT to earn $0.90 per share on $27.44 in revenue, representing year-over-year growth of seven per cent on EPS and eleven per cent in revenue.