Shares in Microsoft Corporation (NASDAQ:MSFT) plunged, along with the rest of the technology sector, after the presidential election, but now MSFT appears to have reversed course after finding support at its 50-day moving average.
That should put any short-term fears on this name to rest.
The wholesale slamming of technology sector stocks was something of a head-scratcher anyway. The President-elect has talked about giving corporations a tax break on repatriated earnings. Excluding financials, no sector of the market holds more cash — and cash overseas — than tech.
Indeed, MSFT ended the second quarter with more cash and short-term investments than Apple Inc. (NASDAQ:AAPL) or Alphabet Inc (NASDAQ:GOOGL). Include long-term investments and MSFT has $123 billion in cash. A lot of that cash is held overseas. If MSFT were prompted to bring some of that back, thanks to much lower taxes, that could provide a windfall for share repurchases and dividends.
But, that should remain a secondary point for the bulls. The primary reason to be optimistic about MSFT stock is that it’s a big player in a hot new industry. Cloud-based services are still dominated by Amazon.com, Inc. (NASDAQ:AMZN), but Microsoft is proving to be a formidable No. 2. As we saw in the most recent quarter, the company has, at long last, found something that can one day take over for its long-time dominance in personal computers.
It’s true, though, that the cloud is still a minority part of MSFT total revenue. Software aimed at PCs still accounts for a hefty chunk of the top line, even as PC sales remain a slowly melting iceberg. But, there’s no question that the green field is there.
The Street Is Bullish on MSFT
Analysts at Evercore ISI rate MSFT shares a “buy” with a target price of $87 in their most bullish scenario. That gives the Microsoft stock price implied upside of 47% within the next 12 months or so. Here’s a summary of Evercore ISI’s investment thesis:
“Overall, we believe that Microsoft remains one of best-positioned large-cap names in the context of the broader shift to cloud, given strong momentum with the company’s Commercial Cloud offerings — namely Office 365 and Azure. In the Productivity and Business Process (PBP) business unit, Office 365 (up 54% constant currency in the fiscal first quarter) will likely emerge as the key driver of value through 2021.”
That’s a popular way of looking at Microsoft stock and the company’s future in the cloud. Of the 35 analysts covering Microsoft stock, 23 have it at buy, 10 say it’s a hold and two call it a sell, according to Thomson Reuters Analytics. The average price target of $65 makes for implied upside of about 10% in the next year.
That would put Microsoft stock on the border between hold and buy, but we can expect some price target hikes once we get through this period of uncertainty for tech stocks. Incidentally, the top target polled by Thomson Reuters stands at $72, which gives implied upside in MSFT of nearly 30%. The low target of $41 suggests the opposite.
Still, bullishness remains the better bet, given the strides MSFT is making in enterprise-facing products and services. Revenue had been in decline for five consecutive quarters, as the cloud couldn’t make up for decreases elsewhere. The top line actually grew in the most recent quarter, thanks to sales of the company’s Azure offering. Sales from the business more than doubled year over year.
Microsoft has made billions in capital investments to compete with industry heavyweight AMZN. Those investments are now starting to pay off and Microsoft has ample room to leverage them going forward. We might be at an inflection point in the company’s pivot to the cloud.
The fundamental story on MSFT stock hasn’t been this strong in ages and the technicals show that investors are willing to step in when needed most. Even under a new administration, Microsoft stock is a buy.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
