Microsoft is no longer a cheap stock, this portfolio manager says

Is there much upside left for tech giant Microsoft Corp (Microsoft Stock Quote, Chart NASDAQ:MSFT)? More than likely, says Empire Life fund manager Ashley Misquitta, who praises the company’s transition towards cloud computing.

Ahead of Microsoft’s first quarter 2019 earnings report tomorrow, tech investors will be hoping for some good news following a few weeks of pullbacks in the sector. For MSFT’s part, it hit a new all-time high of $116.18 on October 3 but has since been dragged down like all of the FAANG group of stocks and is now eight per cent off that high. (All figures in US dollars.)

In July, Microsoft posted quarterly profit and revenue beats to end its fiscal 2018, driven by strong results from its Azure cloud computing services and Office 365 productivity offerings. For Q4, revenue for Azure — second in size only to Amazon’s AWS — grew by a whopping 89 per cent, while the company’s productivity and business processes unit grew by 13.1 per cent.

Those numbers speak to a company that’s done the legwork to position itself well in the still-emerging cloud computing market, says Misquitta, senior portfolio manager at Empire Life.

“Microsoft has a really strong business,” Misquitta told BNN Bloomberg Monday. “With Windows 365 they’re using a cloud-based offering. Then you’ve got Microsoft Azure which is their cloud offering for enterprises which is doing very well —they were kind of behind initially but they seem to have caught up quite nicely.”

“From a secular, tailwinds perspective, that transition to cloud is very much a tailwind for them,” he says.

Consensus estimates for Microsoft’s Q1 2019 include adjusted earnings of $0.96 per share, representing a 14 per cent year-over-year increase, and revenue of $27.72 billion, representing a 13 per cent year-over-year increase.

Misquitta says that although the stock is now trading at a high-end multiple, the company’s balance sheet is hard to beat.

“They’re very free cash flow generative and that’s something that’s going to help dividend growth over time,” Misquitta said. “At 25x forward earnings, it’s on the upper end of things, no question, so it’s not one that I’d be adding aggressively.”

“I think it’s a good business, a little on the expensive side, but over time I think there’s a reasonable chance that you’ll be rewarded for it,” he says.