Buy Microsoft Stock as Growth Engines Accelerate
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Microsoft (NASDAQ:MSFT) the post-earnings recovery and fade is likely due to Nasdaq increasing volatility. Investors can’t decide whether to trade and buy scruffy tech stocks or buy MSFT stocks.
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As inflationary pressures force central banks to raise interest rates faster than expected, tech investors should consider hoarding Microsoft shares.
Buy MSFT shares after strong earnings and guidance
Investors rushed to buy Microsoft shares after it reported earnings of $2.48 per share on $51.7 billion in revenue, up 20% year-over-year. For its size, it is an incredible growth rate. Azure, its cloud business, saw revenue growth of 46% year-on-year.
Thanks to Office 365, which faces almost no real competition, Microsoft’s Productivity and Business Processes unit generated $15.9 billion in revenue, up 19% year-on-year.
For the third quarter, Microsoft forecasts revenue of between $48.5 billion and $49.3 billion. The software giant is not only recession proof, but has a simple growth plan. In the games and metaverse space, the company will spend $68.7 billion to buy Activision (NASDAQ:ATVI). The deal will widen its lead over the competition. For example, sony (NYSE:SONY) responded to the MSFT/ATVI deal by buying Bungie for $3.6 billion.
Sony’s deal doesn’t give it much of an advantage. The game studio’s flagship title, Destiny, will not become an exclusive title on the Sony PlayStation platform. It will also work on Microsoft’s Xbox.
Compared to Metaplatforms (NASDAQ:Facebook), formerly known as Facebook, Microsoft’s purchase of Activision is relatively small. Meta expects the Facebook site to lose daily active users over the coming year. He intends to spend over $90 billion a year to build the Meta Platform. It is a 10 to 15 year effort which is far from guaranteed.
Managing Director Satya Nadella said owning Activision Blizzard will allow people to play “where, when, and how they want, and also shape what comes next for gaming as platforms like the Metaverse grow.” . This strategy has worked well for Microsoft’s mobile and desktop apps. For example, Teams works on multiple platforms, from personal computers to mobile devices. Office 365 is also cross-platform.
During the last quarter, Microsoft registered more than 25 million Game Pass subscribers on PC and console. On the productivity front, Office 365 business revenue grew 19%. It reported an expansion of the installed base across all customer segments. The average revenue per user has also increased. ARPU will also increase again after Microsoft raised subscription fees.
Desktop consumer revenue grew slightly more slowly than commercial revenue, up 15% year-over-year.
LinkedIn continued to grow significantly. Revenue increased 37% year-on-year. This is due to the good results of Marketing Solutions, which increased by 43% year-on-year. Talent Solutions performed better than expected by Microsoft.
With PC hardware, the company recorded revenue of $17.5 billion. Personal computing benefited from strong sales of Surface computers. Windows OEM also lifted unit growth.
Investors looking to gain exposure to the PC market at a deeper discount have other options. storage provider western digital (NASDAQ:WDC) fell below $50 after reporting quarterly earnings on Jan. 27, 2021. The stock is trading at a high single-digit price-to-earnings ratio. HP Inc. (NYSE:HPQ) and Dell (NYSE:Dell) are also trading at a similar P/E multiple.
Corsair Gaming (NASDAQ:CRSR), is a premium game provider. Since its IPO over a year ago, the stock has traded in a sustained downtrend. CRSR stock is twice as expensive as HPQ and DELL stock. As such, his turnaround is not a sure thing.
On Wall Street, not a single analyst has rated MSFT stock below a “buy” rating. Based on 28 analysts who have rated the stock over the past three months, the average price target is $375 (per Tipranks).
The prudent investor can expect a deceleration in growth over the next five years. Suppose competition in the gaming industry intensifies. Additionally, Microsoft will become too big to not be able to repeat past revenue growth. In this scenario, Microsoft shares are worth around $320.
This five-year discounted cash flow EBITDA output finbox model applies the reasonable parameters shown below.
|Discount rate||7.3% – 6.3%||6.80%|
|Multi-Terminal EBITDA||21.2x – 23.2x||22.2x|
|Just value||$299.87 – $335.36||$317.30|
With a multiple of 22.2x and a discount rate of less than 7%, Microsoft shares are trading close to fair value. Readers willing to apply a lower discount rate and a higher terminal EBITDA multiple will obtain a higher target fair value.
The confinement of the past two years has forced people to stay at home. This could have accelerated PC demand and increased game sales. As the world prepares to live with the coronavirus, Microsoft’s gaming software and hardware sales could slow.
Microsoft stock may need to revise its valuation down slightly to account for potential downside risk. If the stock falls another 10-15%, its discount to fair value increases. Value investors looking for exposure to the technology sector should not hesitate to consider MSFT stocks.
So far, it has shown no signs of slowing down. It raised its quarterly forecast and could do so several times this year.
As of the date of publication, Chris Lau had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.
Chris Lau is a contributing author for InvestorPlace.com and many other financial sites. Chris has over 20 years of stock market investing experience and leads the do-it-yourself value investing market on Seeking Alpha. He shares his stock picks so readers get original insights that help improve investment returns.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.