Microsoft stock is getting expensive, this fund manager says

Microsoft (Microsoft Stock Quote, Chart, News NASDAQ:MSFT) has been hanging around its all-time high for a few months now, but is there upside left to the name?

Maybe, says Empire Life’s Ashley Misquitta, who claims that it’s unclear whether or not the impending end-of-support for Windows 7 will give a boost to the company’s profits.

In a year during which the FAANG stocks have had trouble recreating the magic of past performances — for a number of reasons, including trade concerns and anti-trust ongoing investigations — Microsoft has been flying high, with the stock now up almost 38 per cent year-to-date and threatening to break through a $140 barrier into unchartered waters.

Continued strength in its cloud computing segment has a lot to do with it, while management impressed investors last month by approving not only a dividend hike but a $40-billion stock buyback program which comes on the heels of a fiscal year (ended June 30) that saw the company buy back $19.54 billion in shares. (All figures in US dollars.)

But don’t forget Microsoft Windows, which still makes up about 18 per cent of its revenue annually. This year, Microsoft has been pushing Windows 7 users of both the Home and Pro iterations to upgrade or buy new PCs running Windows 10, declaring that by January 14, 2020, the company will not longer offer security updates or technical support for Windows 7.

“We know change can be difficult, that’s why we’re reaching out early to help you backup your files and prepare for what’s next,” reads the pop-up message.

The company is looking to sign up more customers to regular subscriptions rather than one-time payments, with offerings like Office 365’s E5 for business and enterprise which runs at about $35 per month.

Misquitta, senior portfolio manager of US equities at Empire Life Investments, says that while the end result of discontinuing service on Windows 7 is still unclear, there’s no doubt about Microsoft’s superior performance in recent years.

“[Microsoft CEO Satya Nadella] has done a fantastic job at Microsoft,” says Misquitta, in conversation with BNN Bloomberg on Wednesday. “They’re emphasized certain businesses and they’ve gotten away from the must-be-Windows-first mentality and I think that that has opened up a lot of doors for them.”

“Azure, I think that they’ve done an outstanding job with that, and I think that Microsoft is very well positioned going forward. We’ll see whether the Windows 7 roll-off proves to be a catalyst or not. You’ll see some volatility and they’re not cheap right now — there’s a lot of good news priced in — but at the same time I think that it could present an interesting opportunity going forward,” Misquitta says.

Ahead of Microsoft’s fiscal first quarter report due next week, Microsoft impressed with its fourth quarter fiscal 2019 in July, where revenue grew to $33.7 billion, an increase of 12 per cent year-over-year, and earnings of $1.37 per share, a 21-per-cent increase. Analysts had been expecting revenue of $32.77 billion and earnings of $1.21 per share.