Microsoft is my Top Pick in tech, this portfolio manager says

Portfolio manager Christine Poole has a bunch of reasons why investors should be bulking up their portfolios with some Microsoft (Microsoft Stock Quote, Charts, News, Analysts, Financials NASDAQ:MSFT), starting with the recent drop in share price.

“Microsoft has pulled back about 15 per cent from its highs, but given where it’s at now I think it’s an attractive name to own long term in the technology space,” said Poole, CEO and managing director at GlobeInvest Capital Management, who spoke on BNN Bloomberg on Thursday where she named Microsoft one of her three top picks for the next 12 months.

“We’d be adding it to client portfolios here,” Poole said.

US tech giant Microsoft is probably feeling a little unloved lately, with its share price on a slump since this past November as the market continues its rotation away from high-growth stocks in sectors like technology and into more defensive areas. Rising interest rates are part of the picture, as is a hangover from the tech-friendly past couple of years where the COVID pandemic made work-from-home a common practice and caused companies all over to up their tech game.

That transition has been good for Microsoft, which saw revenue climb 21 per cent over its fiscal 2021 year (ended June 30, 2021). There, its Productivity and Business Processes segment grew revenue by 25 per cent, with notable growth from LinkedIn, revenue up 46 per cent, and Dynamics, Microsoft’s enterprise CRM business, which was up 33 per cent. Even better was Microsoft’s Intelligent Cloud business which delivered a 30 per cent revenue increase to a whopping $17.4 billion.

“We are innovating across the technology stack to help organizations drive new levels of tech intensity across their business,” said Satya Nadella, Chairman and CEO, in the company’s fourth quarter press release last July. “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.”

Even with economies reopening as the pandemic slowly shifts hopefully into the background Microsoft’s growth hasn’t slowed down. It most recent quarter, the company’s fiscal Q2 2022, delivered in January, saw revenue up 20 per cent year-over-year to $51.73 billion, beating out analysts’ average expectation at $50.88 billion. Q2 earnings were also a beat at $2.48 per share versus the expected $2.31 per share.

That kind of growth should have investors’ attention, Poole says.

“We know that Microsoft’s cloud infrastructure business Azure is doing very well. Last quarter, they reported 46 per cent year-over-year constant currency growth, and management alluded they actually think that growth will accelerate this year and the next quarter coming up because of the bookings and the backlog they see,” Poole said.

“As well, we know there was obviously some pull forward with the health crisis and everyone working from home and that benefited their Windows and Office products,” she said. “I think we’re going to see growth moderate and I think you’re seeing that baked into the share estimates that the analysts have out there.”

Poole says she likes how Microsoft managed to transition its Office 365 product suite from a one-time subscription fee into a recurring revenue stream, along with its LinkedIn digital tool which has really taken over the job and networking space. Then there’s Microsoft’s $70-billion bid to acquire video game development company Activision Blizzard, a deal that has yet to meet regulatory muster.

“Microsoft announced the acquisition of Activision and we’ll have to see if that ends up playing out, but if it’s successful that will really broaden their participation and share in the gaming space, which I think longer term is an interesting area to be,” Poole said. “And given how everyone’s talking about the metaverse and what we’re going to be doing there that would provide Microsoft a very attractive point to start to grow their presence if that materializes.”

“And, finally, they have a really strong balance sheet which always helps,” Poole said. “If there are companies you want to buy, you want a strong balance sheet, and they’re in a net cash position to fund their growth and R&D.”

Microsoft, which comes with a small dividend currently at a yield of 0.9 per cent, finished 2021 up a full 51 per cent but so far this year the stock is down almost 17 per cent. MSFT had a ten per cent rally over the second half of March but the stock has since lost those gains and is currently trading around the $280 per share mark.