Despite all the whining about the latest tech wreck, Microsoft (NASDAQ:MSFT) stock has held up pretty well.
Shares are down just 3.5% since it announced earnings that were seen as disappointing on April 27. But they’re still up 7.5% on the year. Analysts continue to pound the table for MSFT stock, predicting a rise of 25% over the next year.
Microsoft was due to open May 13 at about $241/share. That’s a market capitalization of $1.8 trillion on 2020 sales of $143 billion, of which more than $44 billion hit the net income line. For those scoring at home, the price-to-earnings ratio is 32.5, and the price-to-sales ratio is 12.5.
This is an expensive stock.
Why MSFT Stock?
Microsoft managed to grow 14% last year, at scale, and grew earnings by 13%. Despite having a network of cloud data centers valued at $53 billion, it ended March with $125 billion in cash. Its purchase of Nuance (NASDAQ:NUAN) for $16 billion, $19.7 billion including debt, is thus easily affordable.
Nuance is just the latest in a string of acquisitions Microsoft made lately to boost growth. Earlier it spent $7.6 billion on Zenimax, a game company, and $10 billion on Discord, a chat application.
How Microsoft explained Nuance is worthy of note. I’ve seen Nuance for years as a speech translation program. Microsoft calls it a key part of its healthcare cloud strategy. That’s because Nuance found traction transcribing doctors’ notes into health records and putting this software on the cloud. Thus, Microsoft hopes to use Nuance to win more hospital cloud contracts.
It’s a reasonable belief. Big enterprises are moving to cloud computing as fast as they can. Microsoft rivals like Alphabet (NASDAQ:GOOGL) are investing billions in salesmen to call on these customers, offering low, low prices that include full application suites. The way to compete is by providing cloud services that are specific to industries, as was done with database applications a decade ago. Microsoft is continuing to gain cloud share.
How Much Is Too Much?
MSFT stock has been a star in my personal portfolio and is giving many other people a golden retirement. Shares are up 367% over the last five years. While today’s dividend yield is under 1%, those 5-year-old shares are getting a yield of 4%, which I’ve turned into even more Microsoft stock.
While Microsoft wasn’t hit nearly as hard by the latest downturn as Amazon (NASDAQ:AMZN), down 6.6% in the last month, it’s the name analysts are looking to first for a rebound. You can call it overvalued but analysts don’t care. It’s what International Business Machines (NYSE:IBM) was when Microsoft was a start-up.
The biggest risk in the stock is security. Microsoft software was the target application in the Solarwinds hack. The company has had to rethink how it does security.
This is slowing development across the board. A new version of Windows 10, designed to compete with Google Chrome, has been shelved. Its cloud blockchain service is being shut down.
The Bottom Line
Microsoft is no longer a get-rich-quick stock. It’s a defensive play. It’s something an analyst recommends when the market goes down and he or she has nothing else to say.
Microsoft has serious security issues. The cost of expanding the Azure cloud is now rising as fast as revenue. While cloud is the most cost-effective way to deploy software, we are in a period of cyber war. Microsoft is a vital part of our national defense.
If I had to sacrifice one of the cloud czars in my portfolio today, it would be Microsoft.
At the time of publication, Dana Blankenhorn directly owned shares in MSFT and AMZN.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.
