For many years following the burst of the dot-com bubble, Microsoft (NASDAQ:MSFT) earned a reputation as a sleepy investment. While it wouldn’t destroy your portfolio due to shoddy business practices causing volatility, Microsoft stock was hardly exciting. But in the last five years, that narrative has shifted: can this momentum continue into 2020 and beyond?
From initial looks, it appears that Microsoft stock has the right stuff. Although the year is young, shares have stormed out of the gate (for a big blue chip), gaining over 5% since this month’s opening price. Furthermore, this bullishness isn’t solely due to technical momentum as fundamental factors help explain the sustained rally.
Primarily, I’m referencing the recent signing of a trade deal between the U.S. and China. For more than a year-and-a-half period, the two nations butted heads, ratcheting up tensions first with fierce rhetoric and later with retaliatory tariffs. The most significant part of the deal, at least as it pertains to Microsoft stock, is that planned tariffs impacting the tech industry will no longer go through.
Furthermore, China will purchase an additional $200 billion on goods and services from the U.S. As a result, tech companies that do significant business with China, such as Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), moved higher on the news.
But is that enough to support the rally in Microsoft stock? Despite the positive developments, skeptics have reason for caution. As the New York Times points out, the terms of the deal are open to interpretation and will be difficult to enforce. Plus, shares may be vulnerable to a possible broader correction.
Still, Microsoft is probably too important to fail.
Multiple Moats Support Microsoft Stock
Before I get into the bullish case, I’m not discounting the equity’s wide-scale fundamental threats. Another flare up with China and certainly a bearish phase in the markets could trip up Microsoft stock. However, the underlying company’s importance to our society and economy would likely mitigate these headwinds.
To start, I’d like to point out that the industrial production index for computers, communications equipment, and semiconductors is one of the few convincing bright spots of the U.S. economy. Since January 2010, the index has jumped over 118%. In other words, in a broader market correction, some sectors will hurt more than others.
While tech will still hurt, it should recover quicker than other industries.
Moreover, Microsoft has built an empire across various subsegments in tech, such as cloud computing and even hardware, which is supposedly an irrelevant endeavor. This dominance mitigates a shock downturn and it also prevents competitors from taking advantage.
Finance professor Robert R. Johnson of Creighton University’s Heider College of Business argues that Microsoft not only has an economic moat, but an incredibly comprehensive one. Johnson explains:
Morningstar has adopted the concept of an economic moat and classifies them into five main types: low-cost producer, switching costs, the network effect, efficient scale, and intangible assets. I would argue that MSFT, incredibly, has four of the five types of economic moats — only lacking low-cost producer status.
For me, the high switching costs is the most important driver for Microsoft stock. For all device platforms, Microsoft ranks second in terms of global market share for operating systems. The company veritably owns PC operating system market share at nearly 78% worldwide.
Essentially, if you want to get anything done – and done professionally – you must go through Microsoft as the cost of switching is steep.
It’s Got Exciting Products Too!
Again, while Microsoft shares haven’t generated much excitement over the long haul, that image changed over the last five years. It’s one of the reasons is that the company is finally bringing compelling products to the table.
For instance, I own both a PC and a Mac, along with many Apple products. Inarguably, Apple has won in the “cool factor” category since they first launched the iPhone. But Microsoft has been charging hard after its rival. In my opinion, their strategy is working: I dare you to try out their latest Microsoft Surface laptops and not be impressed.
Of course, you shouldn’t base your decision on Microsoft stock based on my opinion of the underlying products. Rather, you should consider factors such as Microsoft’s tremendous presence in the lucrative video game industry. It can give sector giant Sony (NYSE:SNE) a run for its money when the two companies release their next-generation consoles.
Perhaps the best way to approach Microsoft is to buy in modestly for now and keep the powder keg dry. Shares might dip because that’s what they do after an extensive rally. But by no means is this a company you would short.
As of this writing, Josh Enomoto is long SNE.