3 Big Reasons to Stick With the Rally in Microsoft Stock

The novel coronavirus pandemic had a shot at knocking Microsoft (NASDAQ:MSFT) down. It did … for a little bit. Then the tech giant reported strong earnings at the end of April, and Microsoft stock came roaring back to all-time highs.

3 Big Reasons to Stick With the Rally in Microsoft Stock

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In a matter of weeks, Microsoft stock has gone from $190, to $130, back to $190.

What’s the next stop on this wild roller coaster ride for Microsoft stock? Prices above $200. Here are three big reasons why the red-hot rally in the stock will persist for the foreseeable future.

  1. The fundamentals are strong, with Covid-19 creating a surge in demand for Microsoft’s cloud-hosted infrastructure, communications, customer relationship management (CRM) and productivity tools.
  2. Microsoft stock remains reasonably valued.
  3. The technicals look strong, and imply that this rally has legs.

Strong Fundamentals

There was concern that the coronavirus pandemic was going to kill IT spending trends across the globe and create significant headwinds for Microsoft’s red-hot cloud business.

That didn’t happen.

Instead, over the past three months, Microsoft’s cloud business has actually gained momentum because Covid-19 has accelerated the pivot from on-premise to cloud-hosted workflows. Demand for Microsoft’s cloud-hosted infrastructure, communications, CRM, and productivity tools has consequently surged.

Last quarter, Office 365 commercial revenues rose 25% year-over-year, as more companies moved their workflows online. Dynamics 365 revenue rose 47% year-over-year. Azure revenue rose 59% year-over-year. Microsoft Teams grew its Daily Active User base by 70% quarter-over-quarter to 75 million users.

All in all, Microsoft’s cloud-based fundamentals remain strong today. They will remain strong for the foreseeable future, too, because the enterprise cloud pivot is here to stay. Strong fundamentals should support continued strength in Microsoft stock.

Reasonable Valuation

Microsoft stock trades at 32-times forward earnings. That matches it’s highest forward earnings multiple of the past decade.

But despite trading at a decade-high valuation, the stock is not overvalued. That’s because Microsoft’s fundamentals are as strong as they’ve been in the past decade, too, with cloud services demand roaring higher as the world increasingly digitizes.

Indeed, if you look out long-term, Microsoft stock seems reasonably valued today.

Powered by double-digit revenue growth and steady profit margin expansion, I see Microsoft’s earnings running towards $12 per share by fiscal 2026. Based on a 25-times forward earnings multiple and a 10% annual discount rate, that equates to a fiscal 2020 price target of about $190.

Thus, while Microsoft’s stock trades at a big forward earnings earnings multiple, shares are still reasonably valued relative to the company’s long-term profit growth potential. Until the valuation gets extended, there’s no reason to believe valuation friction will short-circuit this rally.

Favorable Technicals

Microsoft stock also has one of the prettiest charts in the entire market.

The stock has shown consistent and repeated support at its 200-day moving average over the past three years. The 50-day moving average just started sloping upward, in a sign that this stock’s uptrend is back. Further, the 20-day moving average recently crossed above the 50-day moving average — a “golden cross” technical indicator, which signals that the stock is “breaking out.” Previous times this golden cross indicator has emerged in Microsoft stock, shares were in the first few innings of a multi-month uptrend.

Overall, Microsoft stock is supported by favorable technicals. These technicals broadly imply that the stock can and will keep running higher for the foreseeable future.

The Bottom Line on Microsoft Stock

You don’t see who is naked until the tide washes out.

The economic tide washed out in March, when the coronavirus pandemic brought the global economy to a screeching halt. When the tide washed out, Microsoft wasn’t “naked.” The company was fully clothed, with floaties, a life jacket and flippers.

In other words, Microsoft stock is a long-term winner. Never has this been more clear than today, amid the Covid-19 crisis. Microsoft is powering higher on strong demand for its cloud-hosted services, while other companies are in complete shutdown.

I say stick with the rally in this long-term winner. For the foreseeable future, the stock will keep rallying for the foreseeable future, powered by strong fundamentals, a reasonable valuation and favorable technicals.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long MSFT.

Article printed from InvestorPlace Media, https://investorplace.com/2020/05/3-big-reasons-to-stick-with-the-rally-in-microsoft-stock/.

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