It’s a tough time on many investors, no way around it. But last week, we’ve also witnessed shares of many robust companies, such as Microsoft (NASDAQ:MSFT), stabilizing and yes, even rallying. In the past five trading days, Microsoft stock was up about 9%.
If Microsoft and other bellwether companies can sustain these up moves, we may see new money come into the market in the coming weeks. Therefore, today I’d like to take a detailed look at the company to see how April, as well as the next quarter, may fare for shareholders in Microsoft stock.
Short-term, I expect further volatility with a downward bias in the share price. Nonetheless, I believe long-term investors may consider buying the dip. Here’s why.
What to Expect from Microsoft’s Q3 Earnings
The group is set to release FY20 Q3 earnings in the final week of April. When it announced Q2 earnings in January, Microsoft stock rose on an earnings beat and better-than-expected guidance.
Revenue for the quarter, which ended on Dec. 31, 2019, hit $36.91 billion, a 14 % increase YoY. Similarly, net income increased by 38% GAAP. And EPS came at $1.51 per share vs. $1.32 per share as expected by analysts.
Management reports earnings in three segments:
- Productivity and business processes (includes its Office and Dynamics product lines, and LinkedIn platform) – revenue was $11.8 billion and increased 17%;
- Intelligent cloud (encompasses the company’s server products, cloud services and enterprise services offerings) – revenue was $11.9 billion and increased 27%;
- Personal computing (includes Windows licensing revenue, Xbox-related gaming revenue and revenue from its Surface family of products and PC accessories) – revenue was $13.2 billion and increased 2%.
As these most recent results have confirmed, each segment contributes to the company’s bottom line and robust metrics.
However, since mid-February, broader markets, as well as our daily lives, have been consumed by the health and economic effects of the COVID-19 pandemic.
Current shareholders would appreciate how momentum-driven Microsoft stock is, especially around earnings dates. In other words, when it reports in less than a month, investors can expect rather wide big price swings. If the results come in better than expected, Microsoft stock can easily gap up. And the reverse would also be true if the numbers disappoint, too.
Therefore, if you are not yet a shareholder, you may want to wait to analyze the earnings to see if there may be a hiccup in the results due to the global pandemic. Microsoft is a well-run company, and, before long, we can expect management to rise to any challenge that the global outbreak might have caused the business.
Microsoft is Helping the World Telecommute
One immediate and possibly long-term result of the novel coronavirus outbreak is that telecommuting is now becoming the new normal for a great number of companies and employees.
Investorplace contributor Chris Markoch has recently provided an analysis of three stocks that are likely to benefit from a rush to working from home. And they include Cisco (NASDAQ:CSCO), Zoom (NASDAQ:ZM) as well as Microsoft.
We also need to emphasize that Microsoft’s intelligent cloud segment gets the majority of attention and for good reason. In Q2, revenue rose 27% to $11.9 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.
So far in March, most businesses have had to cancel all non-essential travel. They’re increasingly using technology to facilitate remote working and meetings. Thus we can expect Azure’s strong performance to continue in the near future, too.
In other words, companies offering telecommuting software and services are likely to benefit from the new professional development. If history can act as a guide, Microsoft will continue to innovate and offer solutions to help companies to adjust to the new reality and adopt new technologies.
I’d not be surprised if Microsoft management were to make a reference in the next earnings statement to how the growth in remote working worldwide may impact or rather benefit, its earnings, and hence the stock price.
More Short-Term Volatility Is Likely
Currently, broader markets are having lots of “worst since” as well as “best since” days. It is still somewhat early to estimate how the wide-spreading coronavirus will impact global economies and tech stocks like Microsoft.
Microsoft’s beta stands at 0.99. Thus it moves in tandem with the stock market. In these rather uncertain times, we can, on average, expect MSFT shares to be a proxy for the overall market.
So should you ignore the short-term volatility that may stay with us for a while? If you’re a long-term investor who currently holds Microsoft stock, you may want to hold on to your position.
Alternatively, if you’ve experienced with options, you may also consider using a covered call strategy with, for example, a May 15-expiry. An ATM covered call would enable you to benefit from any up move until then.
It’d also give you enough time to evaluate the Q3 earnings due in several weeks. And you’d also have some downside protection in case of a further decline in MSFT stock.
The Bottom Line on Microsoft Stock
Microsoft management has a long track record of success. And the long-term stock price increase reflects that. Despite the recent sell-off, over the past year, the stock is up about 30%. In the years ahead, I believe the price of MSFT stock is going to rise much more.
Recent research by Robert McGee of Fayetteville State University has compared Microsoft’s revenue with the GDP of 185 nations, including the U.S. If Microsoft were a sovereign country, it’d rank number 58. I’d not bet against such a performance.
However, in the coming weeks, the shares may still stay under pressure along with the markets globally. If you’d still like to have exposure to Microsoft stock, but don’t want to have the full volatility that may come with it, you may instead consider investing in an exchange-traded fund (ETF). Examples of such an ETF would include the Technology Select Sector SPDR Fund (NYSEARCA:XLK), iShares U.S. Technology ETF (NYSEARCA:IYW) or Vanguard Information Technology ETF (NYSEARCA:VGT).
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.