The market may still have a hate-on for the big American tech companies but that doesn’t mean you need to run with the herd. That’s the advice from portfolio manager Brian Madden, who has Microsoft (Microsoft Stock Quote, Charts, News, Analysts, Financials NASDAQ:MSFT) as a Top Pick for the next 12 months.
“What we like about it is it’s a scale advantage, defensive growth company with great exposure to a few long-term secular info-tech growth themes, notably, digital transformation, cloud computing, business intelligence, analytics and collaboration,” said Madden, CIO at First Avenue Investment Counsel, who spoke on BNN Bloomberg on Thursday.
Madden said the proof is in how many times a day we’re touching Microsoft’s products, whether it’s cloud computing in Azure or hardware like its Surface tablets, Microsoft Office, Microsoft Teams, Xbox and on it goes. And while having a stake in all these areas is great, Madden argues that it’s Microsoft’s ability over the years to generate revenue from its products that makes the difference. Madden pointed out that 70 per cent of Microsoft’s revenue is now of the recurring variety.
“The thing that they’ve done that’s allowed the shares to rerate upwards over the last decade or so is they’ve converted a lot of license revenue to a recurring revenue model — and investors like recurring revenue,” Madden said.
Microsoft beat analysts expectations in its latest quarterly report, coming in with first quarter fiscal 2023 earnings of $2.35 per share on revenue of $50.12 billion. Analysts had on average been expecting $2.30 per share and $49.61 billion.
But the stock dropped on the quarterly release in late October, as management pulled back the reins on its guidance, calling for just two per cent growth for its upcoming quarter.
It’s been a general theme this year for more muted expectations as far as growth is concerned in the tech space, which has put 2022 in stark contrast to the outsized growth exhibited in 2020 and 2021 by the sector. That has stocks like MSFT ending the year well in the red.
But Madden thinks now’s a great time to get a solid name like Microsoft at a good price.
“The shares have actually pulled back 40 per cent from peak to trough this year and are rallying a little bit and last couple of weeks,” he said. “But it’s a great entry point for what we think is going to be one of the largest companies in the world for a long time to come.”
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