Microsoft: great company, expensive stock

With all the turbulence over the first half of 2020, the big tech stocks have been clear winners, with Microsoft (Microsoft Stock Quote, Chart, News NASDAQ:MSFT) being a prime example.

The only problem is the stock’s run has made it a difficult buy at these levels, says Teal Linde, president of Linde Equity, who thinks MSFT is a hold right now.

Microsoft’s share price climbed higher on Monday as investors seemingly can’t get enough of the tech giant. The stock is now up 9.5 per cent for the month of June and up 27.2 per cent for the year so far.

The momentum fueling Microsoft has been in part attributed to the company’s ability to perform well throughout the COVID-19 pandemic, where an economic downturn has been coupled with the work-from-home realities that in many cases call upon Microsoft products to keep folks working remotely.

Microsoft reported a 15 per cent jump in sales in its latest quarter, the company’s fiscal third quarter delivered in late April. And while management cautioned that the full impact of COVID-19 may not show up for a while yet, the initial numbers looked promising, led by Microsoft’s cloud computing business and its Productivity and Business Processes segment, which includes the company’s Dynamics, LinkedIn and
Office businesses. That segment saw revenue grow by 14.7 per cent to $11.74 billion over the fiscal Q3.

Linde says Microsoft even stands out from the other high-flying tech stocks for its solid growth prospects.

“Everyone knows that tech stocks have done very well this year and that’s really been the place to be,” said Linde, who spoke to BNN Bloomberg on Monday. “But there are a lot of tech companies that are seeing their revenues and earnings outlook for 2020 and 2021 decline, quite a bit actually, despite share prices that are holding up or actually rising.”

“Microsoft would be an exception in that they’ve done a great job at maintaining the revenue and earnings outlook for the year. And so it has really become a bastion of stability, and that’s caused the stock to sort of move up further.”

But Microsoft’s gains have made it a little less attractive at the moment, Linde argues.

“It’s the kind of stock that you’d want to own for stability and durability in these kind of traumatic times, but would you buy it now? It’s run up a lot over the last several years, and it’s trading around 30x earnings, so I would probably consider it a hold at this point,” he said.

In Microsoft’s third quarter commentary, CEO Satya Nadella said the COVID-19 pandemic brought about two years’ worth of digital transformation in two months, while CFO Amy Hood wrote, “In this dynamic environment, our sales teams and partners executed a solid third quarter, with Commercial Cloud revenue generating $13.3 billion, up 39 per cent year over year. We remain committed to balancing operational
discipline with continued investments in key strategic areas to drive future growth.”