Microsoft’s (NASDAQ:MSFT) strong cloud business and its Teams collaborative software are among its assets that should enable its stock to perform well when the market’s current downturn is over.
Microsoft’s Cloud Business Can Withstand Tough Economic Times
As I pointed out in a previous column on Amazon (NASDAQ:AMZN), analysts have been generally optimistic about the outlook of large cloud businesses, even as the economy deteriorates. John-David Lovelock, an analyst at research firm Gartner, was quoted by The Seattle Times as saying that no large cloud players, presumably including Microsoft, were scaling back its cloud business. Meanwhile, Corey Quinn, The Duckbill Group’s cloud economist, maintained that large companies transitioning to the cloud all plan to carry out the change over decades. He stated that those transitions won’t be derailed by economic downturns. Further, despite the nation’s current economic difficulties, Lovelock still expects global spending on public cloud services to jump 33% by 2022.
Last quarter, the revenue of Azure, Microsoft’s cloud unit, surged 64% year-over-year. The unit’s revenue growth may slow slightly in the first and second quarters due to many IT professionals’ inability to start large projects and make big decisions while working from home. However, the business’ growth should accelerate to its previous level starting in Q3.
Meanwhile, the U.S. government’s ability to spend money on technology is unlikely to be curtailed much by the recession, and Microsoft appears to be well-positioned when it comes to federal spending. Microsoft won a ten-year, $10 billion cloud contract from the Pentagon which was put on hold last month by a judge. Earlier this month, Wedbush Securities analysts predicted that the Pentagon would split the deal between the two tech giants in order to “move (the contract) along.”
Whatever happens with the JEDI deal, Microsoft will probably be well-positioned vis-a-vis the federal government. If the deal goes through, Microsoft will obviously get a great deal of revenue from it. Additionally, it will be poised to get more contracts from the Pentagon because the department will want its computer systems to be able to work well together. If Microsoft gets around 50% of the revenue from the contract, its cash flow from the deal will still be meaningful, and it will still likely win additional deals from the agency. And in the unlikely event that Microsoft somehow loses the entire deal, the government will probably award it many other contracts in order to compensate the company for the time and effort that it spent in a futile effort to get the JEDI deal.
Teams Should Benefit and the PC Business Should Bounce Back Quickly
Of course, many more companies are likely to buy Microsoft’s collaborative software, Teams, as more and more employees work from home. Although the fact that the software briefly went down on Mar. 16 is not a good thing, it does show how popular the product is becoming. Since demand for it is probably coming not only from the U.S. but also from around the world, Teams could provide a meaningful revenue boost to Microsoft in Q1 and Q2.
On Fen 27, Microsoft warned that the coronavirus outbreak would negatively impact its PC business. Specifically, the software giant stated that the results of its unit which sells Windows for PCs and other Windows software, would come in below the company’s previous guidance. But, as with the company’s cloud business, the results of the Windows unit should improve once IT employees return to their offices. The recession will likely cause the unit’s results to be lower than pre-coronavirus-outbreak levels. But small service businesses, like restaurants and movie theaters, along with travel-related companies, look set to bear the brunt of this recession. Companies with a high percentage of employees who sit in offices buy the lion’s share of PCs and are less likely to be badly hurt by the recession. Consequently, I don’t expect the revenue of the Windows unit to decline much more than 5% year-over-year in Q3 and Q4.
The Bottom Line on Microsoft Stock
The shares have tumbled about 25% from their all-time high, but the company’s cloud business will likely remain strong after the coronavirus crisis ends. Meanwhile, Teams should give the company a lift and Windows should not take too big of a hit during the economic downturn.
Given all of these points, I would recommend buying Microsoft stock at its current levels.