Growth likely to slow for Microsoft, this investor says

US tech giant Microsoft (Microsoft Stock Quote, Charts, News, Analysts, Financials NASDAQ:MSFT) has been rewarding shareholders for years now. And while the company is still doing amazingly well, the stock itself is looking a little more dubious, says Darren Sissons of Campbell, Lee & Ross, who thinks MSFT isn’t a buy at these levels.

“I think what I would do is hold it,” said Sissons, vice-president and partner at Campbell, Lee & Ross, who spoke about Microsoft on a BNN Bloomberg segment on Thursday. 

“To reflect on some of the comments I’ve made with regards to Oracle and Cisco, of the sort of 2000-vintage superstars that are now steady, highly mature and dividend-growing growth stories, I think that Microsoft is somewhat of an exception. And the reason is because the movement into the cloud has really given it a second wind,” he said.

Microsoft delivered its full fiscal years financials in July for the 2021 year ended June 30, showing revenue growing at a pace of 18 per cent over 2020 numbers, coming in at $168.1 billion for the year. That compared to fiscal 2020’s year-over-year growth rate of 14 per cent and fiscal 2019’s rate of also 14 per cent. (All figures in US dollars.)

So, the upward trend is encouraging, as Microsoft’s Intelligent Cloud revenue of $17.4 billion for the fourth quarter fiscal 2021 represented a 30 per cent increase over Q4 2020. That growth rate was better than in its other segments, where Productivity and Business Processes was up 25 per cent to $14.7 billion and More Personal Computing was up nine per cent to $14.1 billion.

But Sissons sees emerging competition in cloud computing to likely diminish growth prospects for MSFT going forward.

“The [cloud business] has obviously been a big growth driver and really, that moving into the cloud was really the same catalyst largely for Oracle,” said Sissons. “But the question we have to get to is, are you paying for future earnings or are you paying for returns driven by investors looking to capture the prior growth?”

“I do think growth is going to slow down and I do think that there are going to be a number of cloud offerings that are going to make the pricing for the segment come down,” he said.

The cloud computing space is itself expected to keep expanding both in terms of adoption and in terms of cloud offerings for companies. A recent Gartner report estimates 2021’s global spend on cloud services at $396 billion and growing by 22 per cent to $482 billion for 2022. Overall, by 2026 public cloud spending will make up more than 45 per cent of all enterprise IT spending compared to under 17 per cent presently, according to the report.

“Today, the cloud underpins most new technological disruptions, including composable business, and has proven itself during times of uncertainty with its resiliency, scalability, flexibility and speed,” the report reads.

“Hybrid, multi-cloud and edge environments are growing and setting the stage for new distributed cloud models. In addition, new wireless communications advances, such as 5G R16 and R17, will push cloud adoption to a new level of broader, deeper and ubiquitous usage. Use cases such as enhanced mobile banking experiences and healthcare transformation will also emerge,” it said.

Microsoft’s share price has had a nice trajectory to it over the past five or more years, going from about $55 in mid-2016 to now a bit above $300 per share. So far in 2021, MSFT is up a solid 36 per cent, which is doing well compared to some of its Big Tech peers such as Amazon at five per cent and Apple at 28 per cent year-to-date.

“Our results show that when we execute well and meet customers’ needs in differentiated ways in large and growing markets, we generate growth, as we’ve seen in our commercial cloud – and in new franchises we’ve built, including gaming, security, and LinkedIn, all of which surpassed $10 billion in annual revenue over the past three years,” said Microsoft CEO Satya Nadella in the company’s fourth quarter 2021 press release.

But Sissons said those gains in share price make the fundamentals a little less attractive for would-be buyers.

“At these levels I find that Microsoft is a great company but what I would suggest is don’t confuse a great company and a great product with a great investment. Because I think if you enter at high levels you run the risk of underperforming,” Sissons said.

“What I would suggest perhaps is looking at other alternatives that haven’t run as much because the chart on Microsoft is actually quite scary when you look at how much it has run,” he said.

“So, great company but I just think it’s too rich and I think the opportunity set here is not as great as it was in the last few years,” Sissons said.