Cloud brightens Microsoft's future

Recent Price $213
Dividend $2.04
Yield 1.0%
P/E Ratio 37
Shares (millions) 7,683
Long-Term Debt as % of Capital 29.7%
52-Week Price Range $217.64 - $131.83

 

Five years ago, Microsoft ($213; MSFT) was contending with the slowdown in personal computers and disappointing product launches in mobile-device markets. The company’s early embrace of cloud computing was just starting to take off, as its clients gravitated toward the new technology’s cost savings and data analysis potential.

Today, Microsoft’s makeover is nearly complete. Now a leading player in the cloud, Microsoft’s market value has more than quadrupled over the past five years. Looking back at the 100 stocks in the S&P 500 Index with the largest market value five years ago, only shares of Amazon.com ($3,186; AMZN) have done better. Encouragingly, Microsoft appears positioned to come out of the coronavirus outbreak in a stronger position than it entered the pandemic. The stock is a Focus List Buy and a Long-Term Buy.

Cloud boosts visibility

In Quadrix®, the stock looks particularly timely, scoring 97 for Momentum and 97 for Earnings Estimates, not to mention an Overall rank of 91. One of the stock’s few Quadrix weaknesses is Value (22). At 38 times trailing earnings, the stock trades well above its five-year median of 30 and industry median of 27. We’re willing to overlook the price tag, given Microsoft’s strong operating momentum, balance sheet, and growth prospects.

For the 12 months ended March, Microsoft increased per-share profits 25%, revenue 13%, and operating cash flow 22%. Free cash flow rose 42% to $28.57 billion over the past 12 months. Recent growth has also been steady, with both per-share profits and revenue rising at double-digit rates in 11 consecutive quarters.

Microsoft has raised its dividend at least 8% in each of the past nine years, while deploying stock buybacks to trim its share count 6% over the past five years. That generosity has barely dented Microsoft’s balance sheet; its cash hoard totals $137.64 billion, versus $84.03 billion in total debt. Net cash equals about $7 per share.

Corporate technology budgets are projected to shrink 5% this year, based on a Goldman Sachs ($204; GS) survey of 130 chief information officers. Microsoft’s shift toward a subscription model for its business software should help stabilize revenue. Additionally, Microsoft says the coronavirus pandemic has driven interest among both existing and potential clients to accelerate their shift toward the cloud. The company is also helping businesses adopt curbside-pickup and remote-selling procedures. Growth trends should continue even after the pandemic. CIOs in the survey expect cloud spending to represent 44% of their technology budget in five years, up from 20% currently.

For the June quarter, Microsoft is expected to report earnings per share of $1.39, up 2%, on revenue growth of 8%. The company has topped the consensus profit estimate in 16 straight quarters and the sales estimate in each of the past five quarters. Analyst estimates are trending higher for fiscal 2021 ending June, with the consensus now projecting 9% profit growth and 11% sales growth.

Microsoft Corp., 1 Microsoft Way, Redmond, WA 98052, (425) 882-8080, www.microsoft.com/investor.

 

Quarter Per-Share Earnings* Sales Change Quarterly Price Range P/E Ratio
Range
Mar '20 $1.40 vs. 1.14 15% $190.70 - $132.52 35 - 25
Dec '19 1.51 vs. 1.10 14% 159.55 - 133.22 32 - 27
Sep '19 1.38 vs. 1.14 14% 142.37 - 130.78 30 - 28
Jun '19 1.37 vs. 1.13 12% 138.40 - 118.10 31 - 26

 

Year
(Jun.)
Sales
(Bil.)
Per-Share Earnings* Per-Share
Dividend
52-Week Price Range P/E Ratio
Range
2019 $125.8 $4.75 $1.80 $138.40 - $93.96 29 - 20
2018 110.4 3.88 1.68 102.69 - 68.02 26 - 18
2017 96.7 3.31 1.56 72.89 - 50.39 22 - 15
2016 92.0 2.79 1.44 56.85 - 39.72 20 - 14

 

Quadrix Scores
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Perform-
ance
Reversion
91 97 22 99 94 97 74 4

 

* Earnings exclude special items.
NA Not Available.
Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.