MSFT with Nobias technology: Is Microsoft’s 12% Year-To-Date Pullback A Buying Opportunity?
Microsoft (MSFT) is widely considered to be one of the world’s highest quality companies. It is one of just two companies in the world with a AAA-rated balance sheet (Johnson and Johnson (JNJ) is the other). MSFT has the world’s second highest market cap, of $2.25 trillion (behind only Apple’s (AAPL) $2.72 trillion total). Microsoft is a leader in the fast growing cloud market. It has developed a strong presence in the artificial intelligence and cybersecurity spaces as well. Most recently, Microsoft made a $69 billion acquisition of Activision-Blizzard, showing strong aspirations in the gaming space as well (Microsoft owns the Xbox gaming platform and in recent years, they’ve been growing their game developer portfolio rapidly). And, not only is this a growth stock, but also a favorite pick amongst dividend growth investors. Microsoft is on a 20-year annual dividend growth streak. And while the company’s dividend yield is rather low, at just 0.84%, this company has been very generous with its shareholder returns. MSFT’s 5 and 10-year dividend growth rates are 9.4% and 13%, respectively.
Needless to say, this $2t+ company has a lot of good things going for it. However, shares have been caught up in the technology sector sell-off that we’ve seen throughout 2022. MSFT is down 12% on a year-to-date basis. And therefore, we wanted to take a look at what the credible authors and analysts that the Nobias algorithm tracks have had to say about this stock recently. Is Microsoft a buy after its recent dip? Let’s find out.
Billy Duberstein, a Nobias 4-star rated, recently posted a bullish article on Microsoft, where he highlighted the company’s primary growth catalysts as well as its present valuation. Duberstein began his piece saying, “One of the biggest winners has been Microsoft ( MSFT -1.63% ), up 374% over the past five years, nearly quadrupling the return of the S&P 500.” He continued, noting that, “Microsoft has proved itself a safe and durable grower, and perhaps the best tech stock to own for older investors and those near retirement.” Then, he posed the same question that we have in this article, “However, is it too late to get in on Microsoft's red-hot performance?” Ultimately, his conclusion was: No, it’s not too late.
MSFT March 2022
Duberstein mentioned that MSFT has reinvented itself in recent years, transforming itself from an out-of-favor old-tech stock into a market darling in the growth space under the leadership of current CEO, Satya Nadella. He wrote, “Nadella had been the head of Microsoft's young but growing cloud computing business, which would usher in a new "cloud first, mobile first" era. Microsoft's Azure cloud computing platform grew by leaps and bounds in short order, and its Office and Dynamics software suite also benefited from the more efficient cloud deployment.”
Duberstein continued, “Nadella then gave Microsoft's prospects a new twist with its "intelligent cloud" strategy, named in 2017, in which artificial intelligence would be infused into all Microsoft's offerings. Integrating AI and machine learning into its cloud and enterprise software, Microsoft made its tools even more automated, productive, and beneficial to customers.” And, regarding the company’s ongoing growth prospects and its valuation, Duberstein said: “Since Microsoft has a number of high-growth products and is currently pursuing even more value-add acquisitions, I think it can sustain 20% or so revenue growth for the next few years at least. And since the company's profit margins are expanding as it grows, earnings should grow even faster. That would bring Microsoft's PEG ratio, or the P/E ratio divided by its growth rate, to a little bit over one. That's not an expensive price at all, provided Microsoft achieves that level of earnings growth.
Julin Lin, a Nobias 4-star rated author also recently published a bullish report on MSFT shares. Lin touched upon the stock’s recent rally (MSFT shares are up more than 30% during the trailing twelve months) and said that he expects to see the company split its stock in the near-term.
In recent years, we’ve seen stock splits from other big-tech names, such as Apple and Tesla (TSLA) inspire strong rallies. And, Lin thinks this is yet another bullish catalyst for MSFT in the near-term. He wrote, “Based on the company’s history of stock splits and the large market cap, I wouldn’t be surprised if we did see a stock split in 2022. Even without a stock split, the stock looks priced for double-digit returns over the next decade.”
Regarding the fundamental impact of a split on the company’s shares, Lin wrote: “A stock split would not create any fundamental value, but the increased liquidity often leads to a rising stock price. It is also possible that the strong performances of stocks following stock splits are not correlated at all, but merely a continuation of the strong price performance prior to the split - after all, stocks need to perform very well in order to justify a stock split.”
But, the potential for a share split isn’t the only reason Lin is bullish. He said, “Long time investors are already very familiar with the success of Azure, which delivered 46% growth. MSFT’s bread and butter services like Office and LinkedIn continued to deliver solid top and bottom line growth.” He continued, saying, “What I think investors should instead focus on is the “more personal computing” segment. This segment has arguably been the most boring of the three segments in recent years. MSFT delivered 15% revenue growth, but that growth has not always been consistent.”
And finally, he touched upon the Activision acquisition, saying: “This would be an all-cash deal meaning it would be immediately accretive, but I expect MSFT to extract considerable value over the long term. For starters, there are the typical synergy benefits, but the combination may also bring rise to a new gaming powerhouse as MSFT will be able to invest considerable cash flows above and beyond what ATVI had itself.”
Lin also touched upon the company’s valuation after its recent pullback. He wrote, “Is MSFT a buy now? Trading at 33x earnings, I could see the stock outperforming the market indices for a long time.” He continued, “Due to the constant innovation at the company, I could see the stock sustaining at least a 25x-30x earnings multiple. Yet with revenues projected to grow double-digit for many years, the stock could deliver double-digit returns from growth alone.”
Ultimately, Lin said, “I rate shares a buy, though note that there may be better buying opportunities elsewhere in the tech sector, albeit at higher risk than MSFT.” However, he noted that MSFT offers unique profitability metrics and a strong balance sheet, which makes it an easy company to accumulate. He concluded his piece saying, “Throw in the 3% earnings yield and the fact that the company has $50 billion of net cash, and one can see the increased certainty in the projected returns.”
Zvi Bar, a Nobias 4-star rated author recently posted a more conservative report, saying that he believes MSFT shares will remain rangebound in the short-term, due to several headwinds holding the stock back. Bar began his piece by highlighting the strong earnings report that MSFT posted in late-January. He wrote, “The company's results were strong, with revenue of $51.7 billion and diluted earnings per share of $2.48 within the quarter. This is an increase of about 20% to revenue, and 22% to EPS compared to the same quarter one year earlier. Further, both revenue and EPS were above most estimates.” However, he continued, “The numbers were great, and the shares appreciated in response, but have not moved much since then.” Therefore, Bar has arrived at the conclusion that, “Microsoft Corporation's (MSFT) shares appear likely to remain rangebound for the next quarter or two for multiple reasons, including the pending acquisition of Activision Blizzard Inc. (ATVI). Beyond that, it is also the case that Microsoft substantially appreciated over the last two years.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
In his mind, the stock’s recent pullback seems “reasonable” after, “Shares went through an unreal melt-up that took MSFT from around $290 at the start of October to about $345 in mid-November.” And, he noted, the Activision-Blizzard acquisition adds more downside pressure to the stock due to the potential of heightened regulatory scrutiny. Bar said, “Another downside risk is that Microsoft gets targeted in some way by a government agency. There already appears to be some level of scrutiny from the FTC, and it is possible that this will become a greater issue. Since the market reacted poorly to the proposed acquisition, the risk from the deal should only be so great from here, and it may be priced into the shares already.” Bar concluded his article saying, “I believe MSFT is likely to remain rangebound between its recent lows and the highs it set late last year. This range is reasonably wide, at nearly 20% of the market valuation, with Microsoft sitting sort of in the middle right now. This may be good reason to consider selling short-term covered calls against an existing position on any further strength.”
Looking at the broader aggregated opinion of the authors that the Nobias algorithm follows, we see that 89% of recently expressed opinions were “Bullish” on MSFT shares. And, when looking at the opinions expressed by credible Wall Street analysts (only those with a 4 or 5-star Nobias rating), we see that the average price target being applied to MSFT shares is currently $377.46. Today, MSFT trades for $291.64. Therefore, that $377.46 average price target implies upside potential of approximately 29.4%.
Disclosure: Of the stocks mentioned in this article, Nicholas Ward is long MSFT, JNJ, and AAPL. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.