As the coronavirus spreads, Microsoft Corporation (NASDAQ:MSFT) has asked employees to work from home. The pandemic has almost translated into a global lockdown and equity markets have been in a panic mode. Microsoft stock has not been immune to the panic and has declined by 26% from its 52-week highs of $190.70. The stock seems to be discounting the likelihood of recession for the first half of fiscal 2020.
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However, beyond the coronavirus induced crisis, Microsoft is a high-quality cash flow machine to consider for the portfolio. This column will discuss the factors that make Microsoft stock worth accumulating over the next few months.
I want to start with a technical perspective on the stock. The company’s stock traded in the region of $130 to $140 for nearly five months in fiscal year 2019 before the rally towards the end of the year. Even in the recent correction, the stock has bounced back from near-term lows of $135. This zone serves as strong technical support.
From a fundamental perspective, Deutsche Bank has maintained a “buy” rating on Microsoft with a price target of $180. This target is after discounting the coronavirus impact on the company’s business. This might be an indication of the point that the stock has bottomed out.
Another factor that makes Microsoft attractive amid stock market volatility is a stock beta of 1.09. Microsoft is therefore a defensive stock with a sustainable dividend payout of $2.04.
Office Closures Can Help Microsoft Business Growth
In every challenge, there is an opportunity.
With the United States in lock-down mode, all companies are encouraging employees to work from home. Microsoft Teams becomes relevant here as it offers several benefits for remote work. This includes voice call, video call, chat, and secure document collaboration.
Currently, Microsoft is offering a free six-month “Office 365 E1” trial. With the entire setup done in less than a week, Microsoft stands to benefit from the remote work trend.
It is worth noting that Microsoft team has already been growing fast as compared to its rival Slack Technologies (NYSE:WORK). The addition of such benefits to the Office 365 business cloud productivity suite will continue to boost the company’s subscription-based revenue.
Microsoft Azure Will Drive Revenue Growth
For the company, Azure has been growing at a stellar pace and is a key reason to be bullish. Microsoft does not report Azure revenue separately but does provide the growth rate. In the 13 of the last 14 quarters, Azure has clocked growth in excess of 60%.
According to Gartner, Azure has annual revenue of $5 billion and a 60% growth rate is therefore stellar. With cloud services expected to show sustained growth, Microsoft is well positioned to benefit from the trend.
I want to point out here that a near-term risk for Microsoft is the $10 billion cloud services contract awarded by the Department of Defense. With Amazon (NASDAQ:AMZN) filing a complaint, the federal government asked that a court allow the DoD to reconsider its decision. Any potential change in the contract can impact Microsoft stock.
However, growth for Azure is not dependent solely on the contract. With companies increasingly adopting multi-cloud approaches, there is more business to be captured in the coming years.
My Concluding Views on Microsoft Stock
Microsoft’s earnings growth is likely at 13.2% in the next five years and this factor makes the stock worth considering. The growth from the cloud business will remain strong and so will the cash flows. I therefore expect higher dividends in the coming years.
I want to add that Microsoft has already revised its third-quarter 2020 guidance. This factor is discounted in the stock. It’s unlikely that business will be impacted beyond Q3 2020.
In addition to organic growth, Microsoft has been active on the acquisition front. That enables the company to acquire innovation driven startups and to integrate the technology in their own suite of offerings.
Overall, Microsoft stock is attractive around the levels of $140. I expect the stock to be back to its 52-week high once the coronavirus is contained and global business claws back to normalcy.
Faisal Humayun is senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.