Microsoft's revenue and profits continue to exceed expectations and analysts see more profit in store.
Microsoft stocks, trading near record highs, have more room to run.
For income investors, MSFT offers an attractive dividend stream that is growing steadily.
With valuations at historical extremes, stock choice becomes more difficult for many investors. In addition, with stock prices soaring thanks to generous Fed and government stimulus, many market participants are now anticipating the start of the Federal Reserve's winding down, which could send stocks plummeting.
This combination of factors leads to uncertainty for long-term investors who want to earn a stable income but still want to achieve decent capital gains. In such an uncertain environment, it is always a good strategic move to take refuge in defensive companies with a lot of money and the proven ability to weather any downturn. Of this group of dominant players, Microsoft (NASDAQ:) is our top pick. In addition to doubling in value since the March 2020 market crash, there are plenty of reasons to believe that Microsoft is not only a safe investment, but continues to have more upside potential.
The Redmond, Washington-based technology giant's business can be divided into two segments: legacy products, such as MS Office and other software the company has developed, and a second division that includes high-growth new technology operations, such as cloud computing, artificial intelligence and gaming.
Since the global health crisis began, Microsoft has fired every cylinder. The pandemic changed the way we work, study and entertain ourselves. The changing dynamics of everyday life under COVID-19 has placed Microsoft in an ideal position to benefit greatly as it continues to grow. Recently, MSFT posted revenue and profits that exceeded analyst estimates for the 10th consecutive quarter, demonstrating that CEO Satya Nadella's strategy to make Microsoft the largest cloud computing provider remains on track. Microsoft's Intelligent Cloud segment accounted for 33.8% of the company's revenue in 2020, making it the largest of the tech giant's key business units for the first time. % progress over the past five years – a period when Nadella also found new areas of growth. During his tenure, more than $45 billion was spent acquiring companies, including the business social networking site LinkedIn, the video game developers Mojang and Zenimax, and the code storage service GitHub. Each of those bets has largely paid off. . The pandemic has fueled demand for the company's communication tools and other services. Millions of workers and students who were stuck at home during lockdowns used the company's meeting software, Teams, to keep in touch and stay connected. Teams, the Microsoft product that competes with Slack Technologies (NYSE:), reached 250 million monthly active users in July, a huge jump from the 145 million the company reported in April. ?
Yet the relentless rally of the past five years that saw Microsoft stock, which closed at $296.99 on Monday, soared nearly 450% higher, is likely making investors wonder if the stock is too expensive. have become buy?
Most analysts believe that the relatively expensive stock price appropriately reflects expectations for the company's future growth. trend that continues after the spread of the Delta variant, the growth momentum of MSFT remains intact. The company maintained its buy rating for the stock while increasing its price target from $325 to $350. The Wedbush note added:
"Microsoft remains our favorite large-cap cloud game and we think stocks will move higher towards the end of the year as the Street continues to appreciate the cloud transformation story."
Because of this strong growth potential, most analysts see no problem in issuing a buy recommendation to MSFT, even at these record high levels.
Of 36 analysts surveyed by Investing.com reporting Microsoft, 33 has an outperform rating for the stock. Chart: Investing.com
The average 12-month price target of these analysts is $332.32 price target, an increase of almost 12%.
In addition, the technical data of the stock was promising; previous pullbacks hit the support perfectly. "If this thing stays above $275, there's no doubt about it, you must be tall," Blue Line Capital founder and president Bill Baruch told CNBC in a recent interview.
Promising revenue potential
Along with its excellent growth potential, Microsoft is one of the few mega-cap tech giants to pay regular dividends. It currently yields 0.76% and pays $0.56 per quarter. In addition, the payout ratio is low, 27.54%. While not robust, the dividend looks even more promising when you consider that the company has an 82% share of the desktop operating system market and generates massive amounts of recurring cash. for the company. Now a subscription-based service for Microsoft's millions of home and business users, Office's flagship continues to be a powerful revenue driver. ago, Microsoft said in a blog post last month that the price for its 365 Business Basic plan will increase by 20% to $6 per user, while the high-end version of the suite will increase from $32 to $36 per user. Analysts estimate the move will add $5 billion to the company's revenue by 2022. Which means there's plenty of room to accelerate the company's payouts. Currently, MSFT's dividend growth rate is about 10% per year, which has provided a nice buffer against inflation for the past five years. to put in your wallet. These are the giants who have the power to defend their business and reward you for being a stakeholder for the rest of your life.
That return may seem small to many investors, but remember that Microsoft still does. is. grow, while also offering great upside potential. Including dividend payments, Microsoft has made more than 400% of total returns over the past five years. Despite a very impressive rally in the past year, Microsoft continues to offer more upward and regular revenue streams. That's hard to beat.
The company is in the right companies and offers a sustainable competitive advantage along with recurring cash flows, making the stock an important asset for any long-term portfolio.
