Microsoft is still a favourite growth play for investors
In a world of sputtering growth for technology companies, some investors are gravitating towards Microsoft as the closest thing to a safe bet.
The attractions those bulls see should be on display in the Redmond, Washington-based company’s fourth quarter results after the market close on Tuesday: Wall Street expects Microsoft will report earnings growth of 6% and a 14% increase in revenue, extending a years-long streak of double-digit sales expansion.
While Microsoft hasn’t been immune to this year’s tech stock selloff, the company has a reputation for durable growth, thanks to business software and cloud computing offerings that analysts see as mission critical for corporations, making customers unlikely to drop them in a downturn. And the stock looks like more of a bargain than it did during the 2021 tech surge.
“Within the sector it looks pretty strong, and the valuation is supported by real improvements in the fundamentals,” said Hal Reynolds, who oversees more than US$15-billion as chief investment officer at Los Angeles Capital Management. “That a name like this is now more attractively priced makes it easier to move back into the sector.”
Microsoft shares have fallen 23% this year, a smaller drop than the Nasdaq 100 Index and the iShares Expanded Tech-Software Sector ETF. The stock now fetches 24 times estimated earnings, below its five-year average of 27.4.
In early June, Microsoft pared its fourth quarter outlook, and the company also is slowing hiring in its security software and Azure cloud businesses, given weaker economic conditions.
Analysts and investors have largely brushed these issues off, noting the lower outlook was credited to the impact of a stronger dollar, as opposed to weakening fundamentals, while the hiring slowdown will limit expenses. More than 90% of analysts recommend buying the stock, and it’s the second-highest-rated tech stock in the Nasdaq 100, after Crowdstrike Holdings.
‘Pulling the levers’
The spending pullback shows the company is “pulling the levers it needs to pull in order to protect its earnings and margins”, said Matt Peron, director of research at Janus Henderson.
While Wall Street remains largely positive on the long-term outlook for software in general, analysts have been lowering their expectations as they brace for a potential recession. Analysts predict software and services companies will report 2022 earnings growth of 13.6%, down from the 14.8% pace expected in late January, according to data compiled by Bloomberg Intelligence.
The consensus view for Microsoft’s fourth quarter earnings have dropped by 2.9% over the past three months, while the consensus for revenue is down 0.6%. However, should revenue come in close to expectations, it would extend a streak of double-digit growth that began in 2017 — an impressive feat for the world’s third biggest company, with a market capitalisation of $1.9-trillion.
“For a gigacap like Microsoft to grow at a double-digit pace like this is pretty amazing, especially since you’re paying a reasonable multiple for it,” said Janus Henderson’s Peron. “Why not have that at the core of your portfolio?”