Microsoft is not an expensive stock, this investor says

Growth stocks have lost some of their lustre in recent weeks, but investors should stick with a giant like Microsoft (Microsoft Stock Quote, Chart, News NASDAQ:MSFT), says portfolio manager Jason Mann, who argues the stock checks all the right boxes, including not being as expensive as you’d think.

Microsoft’s share price has been inching higher over the past month and getting closer to its record high of $190 set earlier this year.

After generating a monstrous 55 per cent return in 2019, MSFT is on a similar track in 2020, despite the COVID-19-caused market pullback, with its year-to-date return currently at 18 per cent.

The company is said to be one of the pandemic-proof stocks, where its growth areas match well with changes being adopted due to the health crisis, such as remote work, where Microsoft’s Teams platform is seeing a spike in usage. Last month, Microsoft released a new Cloud for Health Care bundle, while its Productivity and Business Processes segment, which includes Dynamics, LinkedIn and Office, saw a 15 per cent jump in revenue in Microsoft’s latest quarter.

Mann said even Microsoft’s small dividend, currently at a one-per-cent yield, could develop over time.

“We do own it,” said Mann, chief investment officer at EdgeHill Partners, who spoke on BNN Bloomberg last Thursday. “It’s interesting because it has a lot of characteristics of the growth stocks — it’s one of the mega cap tech stocks that’s right back at its all time highs.”

“[Microsoft] is one of the real beneficiaries of work from home,” Mann says, “but it’s not that expensive either, so it kind of hits all metrics for us. 41 per cent return on equity. It’s a very high quality entity that throws off a fair bit of cash. A great balance sheet and a tiny yield with lots of room for improvement if they can’t find growth opportunities.”

“So we would hold it,” Mann said.

Microsoft beat analysts’ forecasts in its latest earnings report, delivered in late April with the company’s revenue climbing 15 per cent year-over-year to $35.0 billion and EPS gaining 23 per cent to $1.40 per share. (All figures in US dollars.)

At the time, management was reporting little impact on its business from COVID-19 but guided for slower growth in its next quarter (Microsoft’s fiscal fourth), calling for revenue up just 7.7 per cent for the Q4 with revenue drops likely coming from segments like Enterprise Services and its on-premises server business.

“We’ve seen two years’ worth of digital transformation in two months. From remote teamwork and learning, to sales and customer service, to critical cloud infrastructure and security – we are working alongside customers every day to help them adapt and stay open for business in a world of remote everything,” said Satya Nadella, Microsoft CEO, in an April 29 press release.

“Our durable business model, diversified portfolio, and differentiated technology stack position us well for what’s ahead,” Nadella said.