Tech giant Microsoft (Microsoft Stock Quote, Charts, News, Analysts, Financials NASDAQ:MSFT) had a great 2021 with a return of 51 per cent, but investors thinking the stock is now too hot to touch should think again. So says Allan Boomer of Momentum Advisors, who sees Microsoft as a money-making machine.
“Microsoft I think is a great play. I know the tech stocks are selling off [but] Microsoft I just think has some really, really strong fundamentals,” said Boomer, chief investment officer at Momentum, who spoke on BNN Bloomberg on Friday.
Microsoft’s share price has fallen off fairly sharply to start the year, losing about eight per cent over the first two weeks. But that’s been par for the course where the tech-heavy NASDAQ is down over five per cent to start out the year compared to a drop of about two per cent for the S&P 500.
The current climate seems to be leaning away from growth stocks and towards value plays in preparation for a number of key interest rate hikes this year and perhaps also in recognition of the oversized gains by tech stocks and others who’ve benefitted from the pandemic-influenced economy over the past two years.
That might bode poorly for names like Microsoft but Boomer is nonetheless calling MSFT one of his best ideas for the year ahead.
“Number one, Microsoft is a company that has really, really strong pricing power and when I say pricing power I mean the ability to raise prices without spooking your customers,” Boomer said. “Most of Microsoft’s customers are business-to-business customers, and they’ve raised prices already and folks haven’t really blinked.”
“Number two, Microsoft has a really high ratio of sales per employee. On average, they bring in about a million dollars for every employee they have, which tells me a lot,” he said. “It tells me that they are not hurting for labor. They’ve got high skilled software engineers and the like and because they’re so profitable and they bring in so much revenue on a relatively small customer and employee base that’s a huge asset for Microsoft as well.”
Ahead of Microsoft’s second quarter fiscal 2022 earnings due on January 25, the company registered revenue growth of 22 per cent over its fiscal first, delivered in October. Revenue was $45.3 billion and net income grew by a larger 48 per cent year-over-year to a huge $20.5 billion for a non-GAAP EPS of $2.27 per share. Those top and bottom lines beat the consensus call where analysts had been expecting $44.0 billion in revenue and earnings of $2.07 per share. (All figures in US dollars.)
Microsoft CEO Satya Nadella has pumped the value of his company’s products during the currently challenging economic period.
“Digital technology is a deflationary force in an inflationary economy. Businesses – small and large – can improve productivity and the affordability of their products and services by building tech intensity,” said Nadella in a second quarter 2022 press release. “The Microsoft Cloud delivers the end-to-end platforms and tools organizations need to navigate this time of transition and change.”
The company is seeing lots of growth from business units like its cloud computing Azure platform, which grew revenue by 50 per cent year-over-year in the Q1, while Office 365 Commercial grew by 23 per cent but its Surface product revenue dropped by 17 per cent.
“We expect healthy broad-based growth in our Azure consumption business consistent with recent trends and our user business, while continuing to benefit from Microsoft 365 momentum to see a moderation of growth rates given the size of the install base,” said CFO Amy Hood in the Q1 conference call.
Analyst Dan Ives of Wedbush Secuities is another fan of Microsoft, rating the stock a “Buy” with a target price of $375, which at press time represented a projected return of 21 per cent. As reported on CNBC last week, Ives said he’s encouraged by strong enterprise spending on Azure and will be “hitting its next gear of growth” soon and should pull market share away from AWS in the cloud computing space. At the same time, Ives sees Microsoft as continuing to benefit from the shift to remote work, a trend and its impact which have yet to be fully priced into Microsoft’s stock.
Last week, Microsoft released a Work Trends Index Special Report on how technology can support frontline workers during the pandemic by helping to modernize workflow, enhance job performance and improve workplace culture and communication. For its part, Microsoft said its Teams collaboration platform has witnessed a 400 per cent growth in use among frontline workers since the start of the pandemic.
“Empowering frontline workers remains essential for digital transformation. Together with our partners, we’re equipping frontline workers with tools that allow them to stay connected with their team and company leadership while concentrating on the customer or job at hand. If done well, we believe technology can modernize workflows and enhance job performance while also improving workplace culture and communication,” said Microsoft corporate vice president Emma Williams in a press release.