Big Tech’s pullback in recent weeks has investors wondering whether stocks like Microsoft (Microsoft Stock Quote, Chart, News, Analysts, Financials NASDAQ:MSFT) are just taking a breather or whether there’s more downside to come. Either way, you shouldn’t be too worried about owning MSFT, says portfolio manager Colin Stewart, who thinks the stock is a long-term hold.
“We do hold some Microsoft in our US Value Fund,” says Stewart, CEO of JC Clark Limited, who spoke on BNN Bloomberg on Wednesday. “I don’t think there’s anything specifically negative around Microsoft and the recent pullback. I think it’s just been a general pullback in technology stocks.”
Microsoft posted a strong 2020, like many of the US tech giants who ended up getting favoured under the pandemic-impacted framework which forced businesses worldwide to adopt new measures to suit the new work-from-home economy.
That environment was to the benefit of Microsoft, whose Azure cloud computing saw accelerated growth last year. With its most recent quarterly report, Microsoft’s second quarter fiscal 2021, delivered in January, the company’s Server products and cloud services revenue grew by 26 per cent year-over-year while Azure itself grew by 50 per cent.
Microsoft said aside from pandemic-related growth, the ongoing digital transformation of services and infrastructure has been a key factor.
“What we have witnessed over the past year is the dawn of a second wave of digital transformation sweeping every company and every industry,” said CEO Satya Nadella in Microsoft’s second quarter press release. “Building their own digital capability is the new currency driving every organization’s resilience and growth. Microsoft is powering this shift with the world’s largest and most comprehensive cloud platform.”
Microsoft’s Q2 featured top and bottom line beats, with revenue of $43.08 billion coming in better than expected by analysts whose consensus estimate was $40.18 billion. EPS of $2.03 per share was also above the expected $1.64 per share. (All figures in US dollars.)
Even the company’s guidance for the upcoming third quarter was a surprise beat, with Microsoft expecting revenue to be in the range of $40.35 to $41.25 billion compared to the Street’s expectation of $38.70 billion.
After finishing 2020 with a return of 41 per cent, MSFT is currently up about seven per cent for 2021, although the stock has fallen about five per cent over the past month.
Stewart said investors who’ve held Microsoft for a while now could consider shaving off some of their position but he thinks there’s no need to be jumping ship.
“Microsoft is not certainly not cheap,” said Stewart. “It’s not as cheap as it once was. The rising tide has lifted all boats in the technology sector and everything has become more expensive.”
“But relative to some of the other technology companies or its peers, I think Microsoft actually is reasonably valued because there are many, many technology companies and software companies that trade at much higher multiples,” he said.
“Microsoft is obviously a dominant software franchise and great gaming franchise and it really has been a phenomenal long-term company, so it’s always possible that you might want to take a little bit off the table if you’ve had a very strong run and a great profit in it,” Stewart said. “But it’s certainly one that we think of as a good business to hold for the long term.”
Microsoft has gone through a number of evolutions along its long history in the software space, with the latest being the growth of its cloud business in relation to its Windows and Office products.
Microsoft currently has three business segments: More Personal Computing, which includes Windows and hardware such as the Surface line and gaming, Intelligent Cloud, which includes the company’s server products including Azure, and Productivity and Business Processes, which includes the Office suite and LinkedIn.
Currently, each segment brings in roughly a third of total revenue, but that parity likely won’t last.
“We have quarterly Azure revenue of $11.8 billion by June 2022, eclipsing Office all-in revenue of $10.9 billion for the first time,” said Piper Sandler analyst Brent Bracelin speaking to CNBC in January. Microsoft doesn’t single out Azure revenue in its financial reports, but Bracelin put it at $7.20 billion for the company’s second quarter 2021, equating to 17 per cent of total revenue compared to just four per cent of total revenue three years ago, according to the CNBC report. Microsoft’s Windows business contributed $5.72 billion in the Q2, according to the company’s quarterly report.
In a February 2 report, Bracelin reiterated his “Overweight” rating on MSFT with a price target of $300. Bracelin called Microsoft “one of the best-positioned Cloud Titans to own over the next decade.” At the time of publication, the analyst’s $300 target represented a projected one-year return of 25 per cent.