Reports fourth quarter 2020 results on Wednesday, July 22, after market closes
Yield forecast: $ 36.43 billion
EPS expectation: $ 1.38
When Microsoft (NASDAQ 🙂 releases fiscal Q4 2020 earnings on Wednesday, it will have to show a lot for itself as to how dominant it will be in the post-pandemic economic environment.
When COVID-19 forced so many office workers to stay at home since March, demand for Microsoft's cloud infrastructure, communications, CRM, and productivity tools soared. For example, consider Team, the suite of workplace collaboration tools from Microsoft.
In May alone, the platform's unique visitors increased 943% from the same period last year, according to a recent report by Goldman Sachs citing Comscore data. Microsoft reported 75 million daily active users of Teams in April – more than triple the number from just three months earlier.
Cloud computing, which was a profit engine even before the pandemic, grows even stronger as companies invest in IT infrastructure to support remote workers. In the latest earnings report, MSFT cloud segment revenues increased by 59%.
Driven by this business power, the shares of the Redmond, Washington-based software behemoth have had a tremendous run so far in 2020. Investors have seen a massive rise following explosive sales growth in the first quarter.
Currently, Microsoft is the most valued company in the world, with a market capitalization of $ 1.6 trillion. The shares have already risen by around 31% this year, after the shares previously delivered a return of around 60% to shareholders in 2019. MSFT closed at $ 211.6 yesterday, slightly below its all-time high of $ 216.38 reached on July 9.
Accelerating Digitalization
The big question for investors now is how far this rally can go? With nearly 33 times future earnings, Microsoft's stock sells at a premium compared to many top tech stocks. They also have the highest multiple the stock has commanded in over 15 years.
In our opinion, the trends that supported Microsoft stock over the five years have been boosted by the pandemic as the digitization of the global economy has accelerated. That translates into increased demand for the company's products and services.
According to Microsoft executives, only the cloud computing segment is large enough to drive the company's revenue growth for the next three to four years.
The rock solid dividend and excellent payout from Microsoft, combined with the momentum in the cloud, add to the appeal of the stock. Since 2004, when the technology giant first started paying out a dividend, the payout has more than quadrupled. Currently, the annual return is 1.09% with a quarterly payout of $ 0.51 per share. Even more comforting, the payout ratio is a low 34.67%, indicating that there is still enough runway for future dividend increases.
Bottom Line
We think Microsoft's earnings momentum will continue as it expands its market share into new areas of the digital economy while maintaining its leading position with older software products such as Windows and Office.
This sustainable benefit will help the company achieve sustainable double-digit growth in revenues, earnings per share and free cash flow, making it a reliable long-term technology share.
