- Reports Q1, 2021 results on Tuesday, Oct. 27, after the market close
- Revenue Expectation: $35.76 billion
- EPS Expectation: $1.54
It’s hard to find anything wrong with the business of tech giant Microsoft (NASDAQ:MSFT) these days. The company has been a net beneficiary during the pandemic which forced workers to stay at home, fueling demand for its cloud and internet-based software subscriptions.
Azure, the brand name of its cloud services, posted a 47% growth in the quarter ended June 30, following a 59% jump in the prior quarter. During the pandemic, more corporate customers have been signing up for Microsoft’s Office productivity software as well as accelerating their transitions to cloud infrastructure.
Helped by this unexpected demand surge, Microsoft shares have gained more than 35% this year, outperforming the benchmark NASDAQ’s 28%. 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.
Though there is no evidence that Microsoft's dominance is under threat, its latest earnings, scheduled to be released tomorrow, could show some tapering off in demand after the initial pandemic-fueled boost.
The Redmond, Washington-based software behemoth is expected to show an 8% overall growth in sales for the quarter ended on Sept. 30, according to analysts consensus estimate, down from 13% expansion during the prior quarter.
Safe Long-Term Bet
Despite this potential slowdown in blistering growth, Microsoft remains one of the safest long-term bets in the technology space. That makes its shares worth buying when they become cheaper.
The reason for this optimism is simple: Microsoft has made all the right moves during the past decade. It’s now in the gratifying position of being able to mine the rewards of its previous investments.
Following a massive transformation spearheaded by Chief Executive Satya Nadella more than five years ago, the company has become one of the most powerful players in the fast-growing cloud-computing market, commanding the segment's second-largest market share, behind Amazon (NASDAQ:AMZN).
Morgan Stanley analysts recently reiterated their “overweight” rating on Microsoft, raising their price target to $245 from $230. Combined with “mid-teens” earnings growth, the analysts see Microsoft’s total return profile as being at a “durable and attractive level” during these unclear times.
Paired with 10% revenue growth, further margin expansion, and share repurchases, the analysts believe the stock has a premium return profile “versus the broader market, which is still not fully reflected in the shares.”
Add Microsoft's rock-solid dividend and excellent track record on payouts and it looks like an even more attractive investment—especially given the uncertainty in the economy.
Since 2004, when the tech giant first began paying a dividend, its payout has swelled more than four-fold. Currently, its annual yield is 1% with a quarterly payout of $0.56 per share, after incorporating a 10% dividend hike announced in September.
Bottom Line
As the post-pandemic rally falters, Microsoft shares lost some ground, falling about 7% from a record high reached in September. It’s likely that Microsoft could head lower if its latest earnings show some weakness. But the company is continuing to expand its market share into new areas of the digital economy while maintaining its leading position with legacy software products such as Windows and Office.
This durable advantage will help the company achieve sustained, double-digit growth in revenue, earnings per share and free cash flow, making it a reliable tech stock to own over the long term.