Is Microsoft Stock a Good Buy for a Tech Portfolio? (NASDAQ: MSFT)

HJBC/iStock Editorial via Getty Images

Investment thesis

Microsoft Corporation (NASDAQ: MSFT) is one of the top tech holdings in our portfolio. The company has transformed since CEO Satya Nadella took over. The tech giant continues to drive growth in the SaaS space. Moreover, its momentum was also supported by the strength of its Azure IaaS. This allowed the company to continue moving its customers’ legacy workloads and applications to the cloud. Additionally, it is exposed to several software themes in the areas of productivity, automation, cybersecurity, data analytics, CRM, ERP, gaming, and metaverse. Moreover, it also has a cloud communications segment which has grown rapidly.

Therefore, we believe investors can take advantage of the company’s well-diversified technology business model by buying MSFT shares. In addition, the company combines growth and profitability very well.

We explain why MSFT stock should be an anchor stock for tech investors. We also share why MSFT stock is a buy it now.

Key measures of MSFT actions

MSFT Share Multiple NTM EBIT & NTM FCF Yield %

MSFT Share Multiple NTM EBIT & NTM FCF Yield % (TIKR)

Consensus price targets for MSFT shares Vs. stock market performance

Consensus price targets for MSFT shares Vs. stock market performance (TIKR)

Microsoft stock has a strong and unmistakable long-term uptrend over time. Therefore, it has proven to be a solid stock for tech investors to hold as an anchor stock. Additionally, investors in MSFT have benefited from market confidence in its resilient business model.

Nevertheless, MSFT stock also suffered during the recent tech bear market. It has fallen more than 15% from its November highs. Admittedly, this was a steep drop for the SaaS monolith. However, its “high growth” but unprofitable/less profitable peers have been beaten even more dramatically (which we discussed in a recent article).

But such a steep correction also created a fantastic opportunity for long-term investors. MSFT’s NTM EBIT multiple of 24.2x returned closer to its 5-year average of 22.2x. Moreover, its NTM FCF yield now seems more attractive at 3.2% (5-year average: 3.9%).

Furthermore, its consensus price targets ((PT)) also look constructive. We can observe that its more conservative PTs have consistently supported Microsoft stock price over the past three years. The stock is currently trading significantly below its most conservative PTs. Our fair value estimates also suggest that MSFT stock appears reasonably valued (+/- 10% of fair value).

Is Microsoft stock worth buying?

Microsoft revenue by segment

Microsoft revenue by segment (Company records)

Microsoft operating margins by segment %

Microsoft operating margins by segment % (Company records)

Keen tech investors should have a good understanding of Microsoft’s well-diversified business model. The company operates three solidly profitable segments that have continued to support its robust growth. Even its former More Personal Computing segment has seen respectable growth as Microsoft sees a revival in the PC. As a result, it has helped Microsoft turn the wheel in its other productivity suite as its users continue their Windows journey. Chief Financial Officer Amy Hood pointed out (edited): “There are more PCs per household and more time spent on PCs. We continue to see that even with hybrid working. Windows 11, I think, is a great investment to have a modern system and beautiful user experience for Windows. We see a good response.

Product manager Panos Panay also wrote an insightful article in January highlighting the momentum of Windows 11. He articulated (edited):

Windows 11 is a catalyst for engagement and growth. We’ve seen strong demand and preference for Windows 11, with people accepting the offer to upgrade to Windows 11 at twice the rate seen for Windows 10.

Windows 11 also has the highest quality and product satisfaction scores of any version of Windows we’ve ever shipped. Windows 11 drives increased engagement people spend 40% more time on their Windows 11 PC compared to Windows 10.

The benefits of multitasking and productivity Windows PCs are used more than ever with nearly half of Windows 11 users using the new Snap layouts. -Microsoft

We also explained Microsoft’s momentum in cloud computing and cybersecurity. Even though AWS (AMZN) continues to be the #1 hyperscaler, Azure has seen strong momentum in hybrid and multicloud. Additionally, its SaaS advantage has also given Microsoft tremendous leverage to integrate new productivity tools and automation software in-house. Such integration has also been very beneficial for its operating margins seen above in its Intelligence Cloud segment.

Nevertheless, Google Cloud (GOOGL) (GOOG) has also been aggressive lately in the area of ​​cybersecurity. It successfully acquired Mandiant (MNDT) to strengthen its cybersecurity architecture, leveraging Mandiant’s MDR capabilities. Microsoft is also rumored to have expressed interest in the deal. However, Google Cloud probably still needs to acquire a top EDR partner to improve its XDR offering. By contrast, Microsoft already has a highly advanced cybersecurity solution, worth $15 billion, up 45% year-on-year.

Is the MSFT stock a buy, sell or hold?

We think long-term investors should consider the opportunity to add MSFT shares after its recent correction. The stock is so strong and well supported that it has not entered a bear market, even though the Invesco QQQ (QQQ) ETF did briefly enter one.

Additionally, we are confident that Microsoft continues to look very well positioned moving forward. It also has many age-old drivers behind its opportunities. Additionally, its robust profitability and free cash flow will continue to provide investors with a defensive posture in the face of higher inflation and higher interest rates.

Consequently, we reiterate our buy rating on MSFT shares.

Comments are closed.