Microsoft Stock Looks Like a Buy Ahead of Earnings

Microsoft (NASDAQ:MSFT) reports earnings after the close of U.S. markets Wednesday, Jan. 29. Analysts surveyed by FactSet expect earnings of $1.32 per share on revenue of $35.67 billion. The stock, one of the best-performing names in the Dow Jones Industrial Average last year, is already reflecting some ebullience with a gain of nearly 5% just this month.

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As of Jan. 28, Microsoft has a market value of $1.26 trillion, good for second among U.S. companies behind Apple (NASDAQ:AAPL). That’s the type of rarefied air where investors, rightfully so, ponder how much more near-term upside is in the cards. Apple answered the question on Tuesday when it smashed fiscal first-quarter earnings estimates, sending the stock rocketing in after-hours trading.

Obviously, that’s not guaranteed to repeat for Microsoft stock, but the point is that fundamentally sound companies with strong growth prospects can continue delivering for investors, regardless of heft. Even if Microsoft stock is looking somewhat richly valued (it is), long-term investors shouldn’t be afraid to wade into the name here and now.

“The Software & Services industry has historically delivered stronger and more consistent earnings beats than the broader market, as businesses quicken the pace of transitioning to cloud-based software solutions,” said State Street Global Advisors in a recent research report.

All Eyes on Azure

Pay close enough, or even causal, attention to Microsoft, and investors are bound to hear plenty about Azure, the company’s burgeoning cloud computing business. In the cloud enterprise space, only Amazon’s (NASDAQ:AMZN) Amazon Web Services is bigger than Azure. But Azure is growing more rapidly and there’s plenty of revenue for both companies and their rivals to seize in this arena.

[Azure] has become the company’s main business,” said Webull CEO Anthony Denier in an email to InvestorPlace. “The other big changes were the company dropped its smartphone venture and remodeled its suite of Office software to better compete with Google. Microsoft has turned the software suite into a subscription service that gets recurring revenue from users instead of a one-time payment.”

At almost 30x forward earnings and at 9.67x sales, Microsoft checks growth stock boxes, but it merits that label and that’s a positive.

The rising share price reflects the market’s perception that Microsoft is once again a growth stock,” said Denier. “This is because Satya Nadella, who became Microsoft’s CEO in 2014, dramatically shifted the company’s main focus from its legacy Windows operating system and made a big bet on cloud computing.”

Cloud computing is seductive, but Microsoft offers investors much more than Azure. For example, the company’s Microsoft Teams – an Office 365 product – is pilfering market share from rival Slack (NYSE:WORK).

Among Microsoft’s various business lines, Office 365 may be among the most boring and under-appreciated.

“Office 365 retains its virtual monopoly in office productivity software, which we do not expect to change anytime soon,” according to Morningstar. “We believe that customers will continue to drive the transition from on-premises to cloud solutions, and revenue growth will remain robust, with margins continuing to improve for the next several years.”

Bottom Line on Microsoft Stock

In terms of being a public company, Microsoft is nearly 35 years old, an age which investors, in previous eras, were loathe to ascribe the growth label. However, thanks to Nadella, this mature leopard is indeed changing its spots and data suggest there’s more growth to be had.

Per Gartner’s latest IT spending forecast for 2020, enterprise software spending is expected to grow more than 10% in the coming two years, as larger companies increasingly adopt cloud-based software solutions,” according to State Street.

And if Azure and Teams aren’t enough to convince investors, there’s Xbox, which will be in the spotlight later this later this year thanks to a significant, looming gaming hardware upgrade cycle.

As of this writing, Todd Shriber did not own any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/01/microsoft-stock-isnt-cheap-but-investors-should-not-be-deterred/.

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