Reports Q1, 2021 results on Tuesday, Oct. 27, after market close
Expected Revenue: $ 35.76 billion
EPS expectation: $ 1.54
It's hard to find anything wrong with the business of technology giant Microsoft (NASDAQ 🙂 these days. The company was a net beneficiary during the pandemic that forced workers to stay at home, fueling demand for cloud and internet-based software subscriptions.
Azure, the brand name of its cloud services, grew 47% in the quarter ended June 30, after a 59% jump in the previous quarter. During the pandemic, more business customers signed up for Microsoft & # 39; s Office productivity software and accelerated their transition to the cloud infrastructure.
Aided by this unexpected surge in demand, Microsoft stock has gained more than 35% this year, outperforming the 28% benchmark. This rally pushed the company's market cap to more than $ 1.5 trillion in September, making it one of the most valuable entities in the world.
While there is no evidence that Microsoft's dominance is under threat, the latest version, released tomorrow, may show some decline in demand after the initial pandemic boost.
The Redmond, Washington-based software giant is expected to show overall sales growth of 8% for the quarter ended September 30, according to analyst consensus estimate, compared to a 13% expansion in the previous quarter.
Secure Long-Term Bet
Despite this potential slowdown in blistering growth, Microsoft remains one of the safest long-term bets in the technology field. That makes it worth buying its shares when they get cheaper.
The reason for this optimism is simple: Microsoft has taken the right steps over the past ten years. It is now in a satisfactory position to mine the rewards of its past investments.
After a massive transformation led by Chief Executive Satya Nadella more than five years ago, the company has grown into one of the most powerful players in the fast-growing cloud computing market, with the segment's second-largest market share after Amazon. (NASDAQ :).
Morgan Stanley analysts recently reiterated their "overweight" assessment on Microsoft, raising their price target from $ 230 to $ 245. Combined with mid-teens earnings growth, the analysts see Microsoft's overall return profile in this unclear times as a "sustainable and attractive level".
Coupled with 10% revenue growth, further margin expansion and share buybacks, the analysts believe the stock has a premium return "to the broader market, which is still not fully reflected. in the shares ".
Add in Microsoft's rock solid dividend and excellent payout record and it seems like an even more attractive investment, especially given the uncertainty in the economy.
Since 2004, when the tech giant first started paying dividends, its payout has more than quadrupled. Currently, the annual return is 1% with a quarterly payout of $ 0.56 per share, following a 10% dividend increase announced in September.
Bottom Line
As the pandemic rally faltered, Microsoft stock lost some ground, falling about 7% from a record high in September. It's likely Microsoft could cut it if the latest earnings show some weakness. But the company continues to expand its market share into new areas of the digital economy, while maintaining its leadership position with legacy software products such as Windows and Office.
This sustainable advantage will help the company achieve sustained, double-digit growth in sales, earnings per share and free cash flow, making it a reliable technology stock to own over the long term.
