With the COVID-19 pandemic, Microsoft (NASDAQ:MSFT) stock has held up fairly well. For the year so far, the return is down 2.91%. By comparison, the S&P 500 is off about 21%.
The performance of Microsoft should not necessarily be a surprise. The fact is that the company has a wide assortment of mission-critical business with dominant market positions.
Yet Microsoft still is far from immune from the economic and social effects of COVID-19.
On Feb. 24, the company issued an update to its guidance. Because of the coronavirus pandemic, the revenue forecast for the More Personal Computing segment for the second quarter of fiscal year 2020 will not be met (it was originally $10.75 billion to $11.15 billion). The main reason was the disruption to the supply chain in China.
The press release did mention that demand remains robust. And as seen during the past few weeks, it does appear that China is making strides with its own recovery.
Now, there could be other issues. Let’s face it, the COVID-19 pandemic has been spreading rapidly across the world. So there will inevitably be depressed demand for IT solutions from those industries that are deeply impacted liked hotels and airlines.
Overall, I still think Microsoft should remain fairly stable as it has a diverse customer base. And there are likely to be positive longer-term positives. Let’s take a look.
When Satya Nadella became CEO of Microsoft in 2014, he was smart to make a big bet on the cloud. At the time, Microsoft was greatly lagging Amazon (NASDAQ:AMZN). But Nadella retooled Microsoft’s existing products, such as Office and Windows, as well as made smart acquisitions like LinkedIn.
The result is that Microsoft is the No. 2 player in the cloud and is quickly catching up to Amazon. And yes, this industry is likely to see even more growth because of COVID-19. As millions of people work from home, there is a huge need for digital technologies.
More importantly, this trend is likely to continue. It seems like a good bet that companies will not want to give up the benefits of cloud applications because of the benefits of lower costs and improved productivity.
A clear example of this is Microsoft’s Teams collaboration platform. During the past week, it recorded a staggering 44 million daily active users, up from 20 million in November! This was the equivalent of adding the entire user base for rival Slack (NYSE:WORK). In fact, Teams is the fastest growing application in Microsoft’s history.
AI (Artificial Intelligence)
AI holds the potential for combating COVID-19. This technology can help by accelerating the speed of identifying potential treatments and vaccines. But AI can also help with improving patient care – such as with better management of hospitals.
As for Microsoft, the company is certainly in a position to help. Keep in mind that it has already joined several efforts, such as the White House’s COVID-19 Open Research Dataset (which provides open access to research papers) and the C3.ai Digital Transformation Institute, a newly formed consortium to help find solutions.
Microsoft’s AI technologies and assets are truly standout. For example, its Azure Cognitive Service platform processes a whopping six billion transactions each month. Microsoft has also made breakthroughs in areas like deep learning and NLP (Natural Language Processing). What’s more, the company has been making venture investments in AI startups and has a $1 billion stake for OpenAI.
Bottom Line on Microsoft Stock
In the near-term, it’s tough to gauge how Microsoft stock will do. Again, there are various risks to parts of its business. But when looking at the next year or two, the prospects definitely look promising, as the company is a leader in strategic categories like cloud computing and AI. If anything, the shares do look like a good core technology holding.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.