Is Microsoft still a buy?

Microsoft (Microsoft Stock Quote, Chart, News, Analysts, Financials NASDAQ:MSFT) has broken out to new all-time highs in recent weeks but is the stock still a buy? You bet, says portfolio manager Alex Ruus, who thinks Microsoft is the one to own among the Big Tech giants.

“Microsoft is one of the preeminent technology stocks, and we actually like it and own it in the portfolio,” said Ruus of Arrow Capital Management, who spoke on BNN Bloomberg on Friday.

“I don’t own a lot of technology because a lot of tech stocks have gotten extremely overvalued here, but Microsoft would still fall into a below fair value category,” he said. “We bought the stock in 2009 and continue to hold it here and we think it’s going higher.”

Now in the rarefied air of the $2 trillion club, Microsoft has been a strong performer over the first half of the year, returning 22 per cent over that timespan compared to 14 per cent for the tech-heavy NASDAQ index. Amazon returned just 5.5 per cent over the first six months, while Apple was up four per cent and Facebook returned 27 per cent. Google came out the winner among FAANG-type stocks at 39 per cent.

Microsoft has been roundly praised in recent years for its ability to keep growing despite its size and longevity as a tech stalwart. Straddling software and hardware, MSFT has continued to grow its Azure cloud business while supporting its Office and Teams products that still command a big portion of the consumer and commercial markets.

“It’s a pretty remarkable company,” Ruus said. “When you get to a trillion-dollar valuation, and very rarely you see this size of company show accelerating growth.”

“As a result of the transition to cloud computing, Microsoft, along with Amazon are one of the two key providers of cloud services to companies, and their businesses have been accelerating and so consequently Microsoft stock has done well,” he said.

“It’s no longer as cheap as it used to be but it’s still a good value here, so if you want to invest in the technology sector we still like Microsoft,” Ruus said.

Microsoft’s topline growth has been remarkable of late, with the company’s fiscal third quarter (delivered in late April) showing revenue up 19 per cent year-over-year to $41.7 billion. Net income for the Q3 was $15.5 billion, up a huge 44 per cent, while earnings of $1.95 per share were up 39 per cent. Analysts had estimated earnings of $1.78 per share on a topline of $41.03 million.

Just as he said a year ago during the earlier days of COVID-19, Microsoft CEO Satya Nadella commented in the third quarter press release that the ongoing digital transformation across all sectors of the economy has been spurred on by pandemic-induced shifts in the business environment, to Microsoft’s benefit.

“Over a year into the pandemic, digital adoption curves aren’t slowing down. They’re accelerating, and it’s just the beginning,” said Nadella in an April 27 press release. “We are building the cloud for the next decade, expanding our addressable market and innovating across every layer of the tech stack to help our customers be resilient and transform.”

Microsoft seems to be firing on all cylinders, with revenue staying strong across most of its business segments. Productivity and Business Processes saw revenue grow by 15 per cent to $13.6 billion, Intelligent Cloud grew by 23 per cent to $15.1 billion, while More Personal Computing, which contains Windows commercial, its Surface and Xbox lines of products and search advertising revenue, grew by 19 per cent to $13.0 billion.

The company impressed on guidance, calling for fiscal fourth quarter revenue between $43.6 and $44.5 billion compared to the $42.98 billion predicted by analysts on average.

Microsoft does well by its shareholders, too, routinely engaging in share buyback programs and continuing to pay a small but longstanding dividend, currently with a 0.8-per-cent yield. Last year, the company purchased over $24 billion worth of MSFT shares.

Investors may have their favourites among the US Big Tech stocks, but when it comes to the two trillion-dollar names — Microsoft and Apple — J.C. O’Hara, chief market technician at MKM Partners, says Microsoft’s comparative outperformance so far this year should give the edge to Apple, at least for the moment.

“If we’re in a bull market and the hallmark of this overall bull market is rotation, I believe Apple is setting up here for a nice catch-up trade. Look at some of its peers — Facebook breaking out, Microsoft breaking out, Google breaking out,” said O’Hara, in a segment on CNBC’s Trading Nation on June 24. “It’s a matter of time before Apple does break out … The catch-up trade will outpace the short-term momentum that Microsoft is seeing.”