[Editor’s note: “Microsoft Stock Remains a Safe Buy in Today’s Uncertain Market” was originally published on April 12. It is regularly updated to include the most relevant information.]
Microsoft (NASDAQ:MSFT) has shown great strength throughout the novel coronavirus pandemic. Growth in the company’s cloud businesses remains in motion. If there ever was a time for cloud computing, now’s likely the moment. This is a strong catalyst, as Microsoft stock has made new highs in recent weeks.
But, whether markets pull back or bounce higher, what’s next? Even as reported coronavirus cases are on the rise again, shares could remain resilient if markets continue to head lower.
Valuation is rich, but may still be reasonable, considering the company’s underlying strength. Even if a “work-from-home” economy extends through the summer, this could mean continued tailwinds for Microsoft’s remote-friendly applications.
These include Skype, Office 365, and now, Microsoft Teams. Speaking of Teams, the collaboration platform is growing rapidly, helping to bolster long-term growth.
Let’s dive in, and see why Microsoft is still a buy in today’s market.
Microsoft Stock, Coronavirus and Teams
In early June, hard-hit stocks briefly went parabolic, as investors jumped back into high-risk sectors. This included airline, casino, and retail names. The types of bricks-and-mortar businesses threatened by coronavirus shutdowns. But, as Wall Street loses confidence in a V-shaped recovery, these recent “high-flyers” could fall back to prior prices.
Yet, with tech names like Microsoft, uncertainty may be limited. Back in April, the company met expectations regarding earnings, citing minimal impact from the pandemic. Revenue from its Azure cloud business grew 59% from the prior year’s quarter. Office 365 revenues climbed 25%. Revenue overall grew 15%, and earnings per share jumped 23% year-over-year.
But growth across these platforms isn’t the only thing to get excited about. Microsoft Teams, a collaboration platform, continues to beat expectations. As our own Luke Lango wrote in May, the platform saw its Daily Active User base surge 70% quarter-over-quarter, to 75 million users.
With Teams, Microsoft is giving rival collaboration SaaS names a run for their money. Goldman Sachs’s Heather Bellini recently said the platform’s success could affect Slack’s (NYSE:WORK) long-term growth. And based on what the analyst team at Baird said in May, Zoom Video (NASDAQ:ZM) may be under competitive threat from Teams as well.
So, what does this success mean going forward? The potential for strong results again this quarter. And while forward multiples may look rich, there could be good reason why a premium valuation is here to stay.
Despite Valuation, MSFT Could Still Head Higher
Before the selloff, Microsoft was one of the hottest stocks out there. Driven by growth in the company’s Azure cloud business, shares soared from around $120 per share in April 2019, to as high as $190.70 per share in February 2020. Quite impressive, considering what’s needed to move the needle for a trillion-dollar company.
When shares took a dip in March, they became more reasonably priced. But even though shares trade higher now than they did pre-pandemic, the stock could continue to trend higher. Even though the tech giant continues to trade at a premium valuation.
What do I mean? Analyst consensus calls for earnings to grow around 9% between Fiscal 2020 (ending June 2020) and Fiscal 2021. In short, you can’t call Microsoft “cheap,” considering its near-term growth prospects.
The stock’s forward price-to-earnings ratio stands at 34.5. Compared to FAANG names like Apple (NASDAQ:AAPL), that looks pricey. Apple trades for around 28.5 times forward earnings.
However, this rich multiple has done little to scare off the analyst community. Deutsche Bank’s Taylor McGinnis recently raised her price target, from $180 per share to $215 per share. Her rationale? The analyst cites Azure’s continued strong prospects. Wedbush’s Dan Ives agrees, saying the stock could head as high as $275 per share.
Yet, there’s a chance shares could head in the other direction, due to valuation. As our own Dana Blankenhorn recently pointed out, the rich valuation of cloud stocks can’t last forever. Keep this in mind as shares trade near all-time highs.
Don’t Expect Big Moves, But Still a Solid Buy
I wouldn’t buy into Microsoft’s stock thinking shares are going to post massive gains in the next year. But, in terms of finding a low-risk opportunity with upside, the company’s shares may be the place to be.
So far, coronavirus has had minimal impact on Microsoft’s bottom line. With recent events serving as a tailwind, growth remains in motion. Add in the potential for Teams to gain critical mass in the next year, and the trillion-dollar tech giant continues to have runway.
Sure, valuation is not dirt cheap, and could easily contract. But in terms of quality and low-risk, it may be worth the price. Whether markets sell-off or climb higher from here, consider adding Microsoft to your stock portfolio.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, he did not hold a position in any of the aforementioned securities.
