Microsoft Stock Is Still One of the Best to Buy and Hold Forever

Microsoft (NASDAQ:MSFT), a tech colossus and one of the hottest stocks on Wall Street, is up 22% in 2019. Microsoft stock, which has recently seen a 52-week high at $123.52, is expected to release earnings on Apr. 24, after the close.

Microsoft Stock Is Still One of the Best to Buy and Hold Forever
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I believe that the strong performance of MSFT stock has been based on robust fundamentals, which I expect to continue in the rest of the year. With earnings season in full swing, let us look at the catalysts that are likely to provide tailwinds to the MSFT stock price.

What to Watch for From Microsoft’s Earnings

As one of the world’s leading technology companies, Microsoft offers a wide range of software products, services and devices, as well as online advertising to a global audience.

In its upcoming earnings report, Microsoft shareholders will pay special attention to three segments:

  • Productivity and business processes (includes its Office and Dynamics product lines, and LinkedIn platform)
  • Intelligent cloud  (encompasses the company’s server products, cloud services and enterprise services offerings)
  • Personal computing (includes Windows licensing revenue, Xbox-related gaming revenue and revenue from its Surface family of products and PC accessories)

Overall, each segment is an important contributor to the company’s bottom line and mostly eye-popping figures. When Microsoft reported its Q2 results on Jan. 30, it posted gains in revenue and earnings, buoyed especially by strong growth in its cloud-based services. The tech giant delivered $32.5 billion in quarterly revenue.

This week, investors will want to see if there is any growth fatigue at the high-profile tech company. The tech giant is expected to report $1-per-share on revenue of $29.84 billion; the reported earnings-per-share for the same quarter in 2018 was 95 cents.

Microsoft stock is momentum-driven, hence it usually experiences big price swings after reporting earnings. In other words, it can easily gap up if the numbers are better than expected, or if the numbers disappoint, the stock can easily gap down, too.

Microsoft Stock Has Excellent Long-Term Growth Metrics

The recent rise in Microsoft stock price shows that Wall Street believes in the company’s growth narrative. MSFT now trades at about 29 times analysts’ consensus 2019 earnings estimate. Let us look at how each of the above segments may continue to add to Microsoft’s future growth as well as the stock price.

Segment-wise, the earning report of Jan. 2018 showed that Microsoft’s productivity and business processes revenue increased 13% to $10.1 billion. Investors also cheered the growth in LinkedIn’s advertising and premium memberships numbers. Microsoft had acquired the social networking platform in 2016 for $26.2 billion. LinkedIn, whose revenue increased 33%, now has over 600 million total users and over 260 million monthly active users (MAUs). In other words, the deal is paying off well for Microsoft.

In its January earnings report, the company’s intelligent cloud segment got the majority of attention and for good reason. Revenue rose 20% to $9.4 billion. Azure, Microsoft’s cloud computing and artificial intelligence (AI) data analytics platform, is now the world’s second fastest growing cloud platform behind Amazon’s (NASDAQ:AMZN) AWS platform.

Azure’s 76% growth on a year-over-year basis indicates that Microsoft is gaining market share in one of the most important growth industries of the coming decade. Azure continues to incorporate applications that businesses that store data on Microsoft cloud also find valuable, including those driven by AI data analytics. In other words, Microsoft customers can use these AI algorithms to analyze data better so that their own bottom lines improve. Furthermore, the gross margin of the commercial cloud business has been increasing steadily over the past quarters — a trend investors hope will continue.

Microsoft’s personal computing segment showed some weakness in the latest earnings numbers. Microsoft Chief Financial Officer Amy Hood said that the revenue from copies of Windows software sold pre-installed on PCs fell 5%, as a result of a shortage of microprocessors. However, going forward, Wall Street is estimating relative stability in this segment. On a brighter note, gaming was a strong area in the sector and it is likely to remain so.

Over the next five years, analysts on average expect Microsoft to grow earnings at an annual rate of 12.35% — another reason why most Wall Street analysts are very positive on MSFT stock. In general, the company has been consistent in beating analysts’ EPS and revenue estimates.

Creating growth opportunities in the highly competitive tech space requires proactive management. And that’s where one of Microsoft’s strengths may lie. Under its CEO Satya Nadella, Microsoft has managed to move to a business model that centers around subscription-based products and services with regularly recurring revenue.

And shareholders in this elite business, who also enjoy a 1.5% dividend yield, have been particularly rewarded. As a primarily subscription-based business, Microsoft now has a stable cash flow, another positive factor to consider for dividend investors.

Short-Term Technical Analysis

Over the past year, Microsoft stock is up almost 28%. Due to the recent impressive run-up in the stock price, short-term technical indicators have become somewhat over-extended. Investors who pay attention to short-term oscillators should note that Microsoft’s technical message has also become “overbought.”

So, following its earnings report, there might be some profit taking in Microsoft stock. It’s likely that a lot of good news has already been priced into the stock price. Microsoft stock’s beta is 1.21, which means its volatility on average is 20% higher than that of the broader market. Therefore, if the industry or the overall market declines as other companies release earnings, the MSFT stock price may also be adversely affected.

Several of Microsoft’s competitors include Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Amazon, Oracle (NYSE:ORCL) and (NYSE:CRM). Therefore, as the market reacts to news and earnings numbers from any of these companies, MSFT’s share price is likely to become choppy, too.

If you already own Microsoft stock, you might want to hold your position. That said, if you are worried about short-term profit taking, then within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3-5% below the current price point, to protect your profits to-date.

If you are an experienced investor in the options market, you may also consider using a covered call strategy with an approximately two-month time horizon. In that case, you may, for example, buy 100 shares of MSFT at a limit price of $123.37 (closing price on Apr. 19) and, at the same time, sell a MSFT June 21 $125 call option, which currently trades at $3.20.

The $125 option is slightly out-of-the-money, offering some downside protection in case of volatility and a decline in MSFT stock. This call option would stop trading on June 21, 2019, and expire on June 22.

I would not advocate bottom-picking in case of near-term price weakness. Yet, I find MSFT stock to be a compelling buy candidate and by the end of 2020, I’d expect the shares to reach $140. In other words, it’s still a good time to be bullish on Microsoft.

The Bottom Line on MSFT Stock

As Microsoft gets ready to release its quarterly results this week, investors who are seeking capital appreciation should keep in mind the company’s dominant position in the cloud sector. Earnings are likely to catalyze Microsoft stock in the coming months, but just as crucial is the visionary stature of management vis a vis its technology peers. I believe that MSFT is on solid track to reach a $1 trillion valuation in the coming months.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

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