Microsoft Stock Is the Right Play for the New Normal

The latest earnings report shows the power of the company’s platform

Microsoft (NASDAQ:MSFT) stock did little on the announcement of its fiscal third quarter results. But of course, the shares had already baked in most of the good news anyway. For the year so far, the return is an impressive 13%, putting the market capitalization at $1.35 trillion.

Microsoft Stock Is the Right Play for the New Normal
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OK then, so let’s take a deeper look at the quarter. Revenues jumped by 15% to $30.57 billion and earnings per share came to $1.40. The Street, on the other hand, was looking for $35.02 billion on the top line and $1.26 for profits.

As for the current quarter, Microsoft forecasts that revenues will range from $35.85 billion to $36.8 billion. By comparison, the analysts’ consensus was for $36.52 billion. In other words, it looks like the momentum will continue for the software giant.

Perhaps the best news for Microsoft stock is that the novel coronavirus had a negligible impact. Keep in mind that in February the company withdrew its guidance for its More Personal Computing segment. But for the most part, this proved to be overly conservative. The revenues in the division grew by 3% on a year-over-year basis to $11 billion, compared to the consensus forecast of $10.46 billion.

Consider that there was strength in the Xbox console business, driven primarily from the stay-at-home orders throughout the world. For the past year, the number of active users on the platform went from 63 million to 90 million.

Then there was some growth with the Surface line. After all, with the impact of the coronavirus, there was much more demand for laptops.

Cloud Power

The cloud business may be at a strategic inflection point for Microsoft stock. Here’s what CEO Satya Nadella had to say about this on the earnings call: “As COVID-19 impacts every aspect of our work and life, we have seen two years’ worth of digital transformation in two months. From remote teamwork and learning, to sales and customer service, to critical cloud infrastructure and security, we are working alongside customers every day to help them stay open for business in a world of remote everything. There is both immediate surge demand, and systemic, structural changes across all of our solution areas that will define the way we live and work going forward.”

For Microsoft’s Intelligent Cloud business, the revenues rose by 27% to $12.28 billion. The main driver was the Azure hosting platform, which logged a 59% spike in growth. Microsoft has continued to aggressively add new functionality to this system. For example, the Artificial Intelligence (AI) technology has seen much traction. This is evident in the fact that its speech recognition service has been critical in helping companies manage surges in customer inquiries because of the coronavirus.

Another essential part of the cloud business is the Productivity & Business Solutions segment, which has franchises like Office. It reported a 15% increase in revenues to $11.7 billion.

Yet there is one product that has seen breakout growth: Microsoft Teams. This is a full-featured video conferencing system. Since early March, the number of daily active users more than doubled to 75 million. Note that there are now 20 organizations with more than 100,000 employees on the platform, such as Pfizer (NYSE:PFE) and SAP (NYSE:SAP). In fact, Accenture (NYSE:ACN) has 500,000.

Bottom Line On Microsoft Stock

Now there are certainly concerns with Microsoft. On the earnings call, there was mention of some weakness with smaller and mid-size customers. LinkedIn has also come under pressure because of the surge in unemployment.

But then again, Microsoft has a diversified set of assets. And the technology is generally mission-critical and provides tangible return on investment. Besides, during times of great uncertainty, customers usually rely on trusted vendors.

It’s true that Microsoft stock is not cheap, with the forward price-to-earning ratio at 31X. But the company certainly deserves a premium, especially since it has once again proven its resilience.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence BasicsHigh-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.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/microsoft-stock-is-the-right-play-for-the-new-normal/.

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