The big American tech stocks have certainly gone out of fashion this year, with names like Amazon, Meta Platforms and Google mired in significant slumps. And although Microsoft (Microsoft Stock Quote, Charts, News, Analysts, Financials NASDAQ:MSFT) has also been beaten up, this is one name that deserves a Buy rating today, according to portfolio manager Teal Linde, who says Microsoft clearly stands out from its Big Tech peers, first off because unlike the rest it’s genuinely a tech stock.
“What we like about Microsoft is it’s actually a technology company,” said Linde, manager at Linde Equity Fund, who spoke on BNN Bloomberg on Monday. “People talk about Google being a tech stock and Facebook, but really if you were to characterize a company by its source of revenue, Google and Facebook are really advertising companies as that’s where they get the vast majority of their revenues.”
“Microsoft is more of an infrastructure platform as a service type company where advertising really has nothing to do with their revenue stream,” he said.
Microsoft shares finished up a percentage point on a better-looking Monday across the board, but like the market in general the stock is down so far in 2022. MSFT is currently off by about 26 per cent year-to-date, which compares to an S&P 500 Index that’s down by 23 per cent and the tech-focused NASDAQ Index which is down by almost 32 per cent.
And just as it’s clear so far in 2022 that the market has less interest in tech in general than it did, say a year ago, there’s also a sense that not all tech is being painted with the same brush. Tech companies showing a lot of promise but so far not much in the way of earnings have been taken to the woodshed, as have names whose growth trajectory has shown signs of weakening.
You can put some of the so-called FAANG stocks in the latter camp, namely, Meta/Facebook and Netflix, both of which have put out quarters recently that missed consensus estimates and prompted revisions of how their user growth would be charting into the future.
Others in that FAANG collective include Amazon, which has experienced a post-pandemic hangover of sorts, with e-commerce trends still supportive of growth but not at the pace of 2020-21. Google/Alphabet also missed estimates with its first quarter 2022 results and then there’s Apple, which has fallen about 28 per cent this year, which is, again, significant but not much compared to the big losses to stocks like FB (down 51 per cent) and NFLX (down 71 per cent).
Of the bunch, Apple is perhaps the other pure tech stock, although its money comes more from hardware and services compared to Microsoft which looks to cloud computing, services, software and hardware for its business.
For Linde, Microsoft’s edge is its pervasiveness in global business, where so many systems already use Microsoft products, making the fruits of the ongoing digital transformation likely to fall easily into MSFT’s basket.
“Because of this whole movement of digitization and [moving] companies to the Cloud, Microsoft has one advantage over Amazon and Google in that they’re already embedded in millions of companies around the world,” Linde said. “And so, as companies start to transition more to the Cloud Microsoft already has those relationships and their Azure offering allows these companies to migrate to the cloud at the pace that the company’s wants, and if companies want to have a hybrid sort of setup that’s possible as well.”
“So, I think Microsoft has a strong future still,” Linde said. “On the sell-off, I think it has mostly sold off with the market and I think at today’s valuation one can justify initiating a position.”
Microsoft, which is due to report earnings on July 26, last reported in April where its fiscal third quarter 2022 featured revenue up 18 per cent year-over-year to $49.4 billion and EPS up nine per cent to $2.22 per share. Analysts had estimates $49.05 billion and EPS of $2.19 per share.