Buy Microsoft for its cloud-computing dominance, this portfolio manager says

Microsoft (Microsoft Stock Quote, Chart, News NASDAQ:MSFT) has been a winner of a stock this year, and in the face of regulatory challenges and privacy concerns rocking many of the US Big Tech names, the company keeps wooing investors with dividend hikes and share buybacks.

But the company’s most alluring feature has to be its cloud business, says Paul Harris, partner and portfolio manager at Harris Douglas Asset Management, who says that Microsoft Azure and its other cloud computing services have the ability to change the way people think about business.

Microsoft has been trading choppily over the past couple of months but investors still have plenty to crow about with the stock up 36 per cent year-to-date and continuing a tradition of solid returns in recent years.

And while the market continues to fret over the future of FAANG stocks like Amazon and Google that are increasingly coming under scrutiny over antitrust concerns, Microsoft can strike a ‘been there, done that’ pose, with its day of reckoning having occurred now almost two decades ago.

And going forward, Harris says that it’s the cloud that’s likely to keep Microsoft purring along.

“We own Microsoft and we’ve owned it for a long time,” says Harris, partner and portfolio manager at Harris Douglas, speaking to BNN Bloomberg on Thursday.

“Microsoft trades at about 23x next year’s earnings and it’s got a 1.1 per cent dividend yield. They’re buying back a lot of their shares and they’ve announced a big dividend increase.”

Harris says, “The issue [with Microsoft] is that it’s a change in the way that people think about computing. So people say, ‘Oh, the cloud, everybody’s going to the cloud,’ and yes, people will go to the cloud and Microsoft will benefit from that, especially since their competitor, AWD, which is an Amazon company, and a lot of retail and pharmaceutical companies don’t want to go to Amazon on the cloud because they compete with them.”

“But what happens on the cloud is that it changes the way people look at businesses —all of a sudden you can have a smart office, a smart factory, and you’re getting all this data and you can analyze that data and you can use AI on it to help companies be more effective. For example, an elevator, you can look at all the data coming out about it and then realize that, oh, you should send someone there today because it’s going to have troubles tomorrow,” he said.

“So, Microsoft has the ability to really change the way we think about businesses with the cloud. It’s not just about moving your stuff to the cloud, it’s more about all those auxiliary products that you add into it that makes it much more fascinating and much more valuable. That’s the idea,” Harris said.

Growth in Microsoft’s cloud segment was again the focus in its latest earnings report, delivered in mid-July and featuring consensus beats on both the top and bottom lines. Microsoft’s fourth quarter 2019 featured $33.7 billion in revenue, a 12 per cent year-over-year increase, and EPS of $1.37 per share, better than the $1.21 per share average predicted by analysts. (All figures in US dollars.).

For the company’s Intelligent Cloud segment, revenues came in at $11.39 billion, better than the expected $11.02 billion and representing a 64-per-cent year-over-year increase. That growth rate was nonetheless lower than it has been in at least four years.