Shares of Microsoft (NASDAQ:MSFT) had a record 2019, but they now trade in a range between $135-$140. Remember that Microsoft stock recently hit a high over $190 in February 2020. It’s safe to say it has fallen from there.
The uptrend ended when market volatility worsened and the major indices, like the Nasdaq Composite and the S&P 500, skidded lower.
Why should investors still like Microsoft stock? The company reported a solid second quarter. But it could not avoid warning investors that it will not meet its third-quarter guidance. This is due to the coronavirus from China hitting Windows OEM and Surface sales.
Microsoft Lowers Third-Quarter Guidance
Microsoft initially forecast quarterly revenue between $10.75 billion and $11.15 billion from its personal computing unit. But the supply chain is returning to normal operations at a slower pace than expected, so the blue-chip giant said that sales from this segment will not meet expectations.
Related semiconductor suppliers fell alongside Microsoft stock in the last month. Advanced Micro Devices (NASDAQ:AMD) is having trouble justifying its valuation to investors. Nvidia (NASDAQ:NVDA) may experience lower graphics gaming card sales in the quarter. And Micron (NASDAQ:MU), which sells memory and flash storage chips, may experience a temporary downturn in the quarter.
Despite the near-term slowdown, Microsoft is charging ahead in its other business units. In the second quarter, gross margins topped 22% on profits of $24.5 billion. Operating income grew 35% to $13.9 billion. Its personal computing segment accounted for a bulk of Microsoft’s revenue ($13.2 billion of the $36.9 billion).
But it’s important to note its strength in other units. Microsoft’s cloud and productivity segments grew 27% and 17%, respectively.
Strong Growth Is Ahead
Investors may extrapolate that the positive cloud and software revenue will continue for the rest of 2020. The global economy will likely stall due to the coronavirus outbreak.
Conversely, Microsoft stock will continue rewarding its investors due to its strong cash flow. The company returned $8.5 billion to shareholders through stock buybacks and dividends. And unlike other overvalued firms whose cost growth exceeds revenue growth, Microsoft has operating expenses under control. Costs rose just 9% year-over-year, to $10.7 billion. The company primarily invested in LinkedIn and cloud engineering.
Office productivity software needs minimal additional investments. So long as its customers shift to cloud services and Office 365, Microsoft’s revenue will keep growing.
Risks with Microsoft Stock
Weaker Windows OEM operating system sales will likely hurt the upcoming quarterly results. However, if the world proves resilient and stems the virus outbreak, the business may resume normal operations soon. China is slowly “springing back” after weeks in a lockdown. This suggests that Microsoft’s PC segment will rebound, too.
Investors may venture into Dell Technologies (NYSE:DELL) or Intel (NASDAQ:INTC) in anticipation of computer sales rebounding later this year.
Beyond the affected segments, Microsoft’s Azure cloud services division offers growth. Revenue grew 62% from last year.
The Bottom Line on Microsoft Stock
Analysts have an average price target of almost $200 a share. And almost all (25 out of 26) analysts rank the stock as a buy.
Do-it-yourself investors may opt to build their fair value model on Microsoft stock. Assuming a discount rate of 7.5% and a terminal EBITDA multiple of 14.1 times, the stock is worth $168.86 Here are the assumptions:
| Metrics | Range | Conclusion |
| Discount Rate | 7%-9% | 7.5% |
| Terminal EBITDA Multiple | 13.1x-15.1x | 14.1x |
| Fair Value | $150.46-$182.30 | $168.86 |
Data courtesy of finbox.io
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, Chris did not hold a position in any of the aforementioned securities.
