Microsoft is a great company and bad investment right now, this investor says

Great companies aren’t always great stock purchases and that applies to Microsoft (Microsoft Stock Quote, Chart, News NASDAQ:MSFT) at the moment, says portfolio manager Gordon Reid of Goodreid Investment Counsel, who thinnks Microsoft is overbought.

“It’s a fabulous company and they’ve done amazing things under [CEO Satya Nadella’s] watch over the last few years. They’ve more or less reinvented themselves, which is a very tough thing to do with a company the size of Microsoft,” said Reid, CEO of Goodreid, who spoke on BNN Bloomberg on Wednesday.

“The cloud business under the banner Azure has done extremely well and it’s probably number two behind Amazon's AWS franchise. Their gaming businesses is very strong and and is contributing and then their traditional business of software has morphed from an off-the-shelf version into buying it on a subscription basis, which is a great business plan and one the market loves because recurring revenue is valued very highly,” Reid said.

“But all that said, the stock is trading at about 35x earnings, and even very, very good companies aren't necessarily the best of stocks from time to time,” Reid said. Microsoft’s share price had a decided pullback with the rest of the tech sector over the month of September, dropping almost seven per cent. But the stock is still up 35 per cent for a year in which businesses across the board have battled COVID-19-related headwinds.

Microsoft has seen the growth of Azure shrink over the pandemic period and its retail outlets have suffered, both of which have eaten into its top line so far in 2020. Even so, the company reported better than expected results in its latest quarter, its fiscal fourth, delivered in July, which saw adjusted earnings of $1.46 per share compared to analysts consensus average at $1.34 per share on revenue of $38.03 billion compared to the Street’s $36.50 billion. Over the last two reported quarters, Microsoft managed to grow its revenue by 15 per cent and then 13 per cent, respectively.

Breaking down the Q4 2020 results, Microsoft saw the greatest uptick in its Intelligent Cloud segment which grew by 17 per cent. More Personal Computing was up to $12.9 billion or 14 per cent year-over-year, while its Office products under Productivity and Business Processes grew by six per cent.

Ahead of fiscal first quarter 2021 earnings due later this month, management has called for revenue to come in at $35.61 billion, which would represent an eight per cent increase over its Q1 2020.

Reid said there may be better moments to buy Microsoft coming up but now’s likely not the time.

“You constantly have to evaluate the price of things because it is, of course, as we know from everyday life, a very big component of the value proposition,” Reid said. “What you’re buying versus what you’re paying: put the two together and you make a decision.”

“So I would pass on Microsoft at this point, but continue to watch it on any pullback, you could get an opportunity here. It’s a great company,” Reid said.