Could Microsoft (MSFT) Be Your Best Long Term Investment?
When it comes to tech stocks to buy for the long run, Microsoft (MSFT Stock Report) is one of the most iconic tech companies in the US. The company remains resilient as the coronavirus pandemic swept across the globe. That’s because the company, like other top tech stocks, could be one of the biggest beneficiaries of the work-from-home measures. As a result, MSFT stocks have rallied sharply off the March lows and are now up nearly 27% year to date, easily outperforming S&P 500, which is relatively flat this year. Will the MSFT stock continue to rally after this week’s earnings report?
Transition To Cloud Computing Makes MSFT Stock A Long Term Bet
Under the leadership of CEO Satya Nadella, the company transformed Windows and Office from local software products into cloud-based services and expanded its cloud infrastructure platform Azure. On top of that, the company also expanded its lineup of Surface devices and nurtured the growth of its Xbox gaming ecosystem.
The switch from one-time installations towards a subscription revenue initially dented earnings growth as the company ramped up its investment. However, those strategies gradually paid off as the company recorded double-digits growth. And then came the pandemic. And Microsoft hit the sweet spot of its ready-to-roll out business. Due to the increasing need for more remote work, demand for cloud services have spiked.
According to last quarter’s report, Microsoft’s intelligent cloud division saw a 29% revenue increase. Microsoft is now the biggest competitor of Amazon.com (AMZN Stock Report) in the cloud computing realm. Microsoft’s Azure is now the world’s second-largest cloud infrastructure platform after Amazon Web Services (AWS).
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MSFT’s Valuation Is At High Level, Is It Justifiable?
“We can’t live without Microsoft’s products and services”. Most of the global workforce has to agree to this statement to a certain extent. The products and services from Microsoft couldn’t be more important, especially when we are in a pandemic. But the big question for Microsoft is that the stock has soared while earnings estimates have only risen slowly.
Wall Street expects earnings of $6.23 per share in fiscal 2021 and $7.17 per share for the year 2022. Here’s the thing, the problem here is that MSFT stock is now trading for 28.3 times those 2022 earnings estimates. Meaning, that is the highest the one year forward earnings multiple has been since 2003. Earnings growth for the company is not fast enough to support that type of multiple indefinitely.
Meanwhile, many investors apparently believe the iconic tech giant deserves its premium price tag. That’s because investors think that the company’s core businesses could still be firing on all cylinders. Being one of the largest cloud giants in the market, its cloud business still has massive upside potential. The upcoming launch of the Xbox series X and new Surface devices will strengthen its hardware business.
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What Are Analysts Expecting For The Fourth Quarter’s Report
Analysts estimate revenue for the company to rise by 8.25% in its fiscal fourth quarter to $36.5 billion, while earnings stay flat from last year at $1.37 per share. That is because gross profit margins could slip to 68.2% from 69.1% a year ago. Analysts believe the most influential segment, which is the intelligent cloud business unit, will achieve a revenue of about $13.1 billion.
Bottom Line For MSFT Stock
While the stock’s valuation seems high for now, the long-term outlook for Microsoft is likely to be very bright. The company’s offerings couldn’t be more important in a world where people will be dependent on their products more than ever. Not to forget the growth potential in the cloud industry. According to Gartner Research, the worldwide public cloud industry will grow by 17% this year. And if you are constantly looking for the next big driver of growth in the technology space, cloud technology is one of them. The potential in the cloud industry makes current MSFT stock valuation look cheap in the long run
