3 Reasons to Buy Microsoft on the Next Dip
There are plenty of reasons to be bullish on Microsoft stock. Here are three of them
As we come off the three-day Memorial Day weekend, U.S. stocks are rallying nicely. The Nasdaq is up on the year, while the S&P 500 is back into the key 3,000 mark. Stocks like Microsoft (NASDAQ:MSFT) have surged back to life as well. Case in point, Microsoft stock is just a few percent away from its prior high.
It’s a difficult time for investors. One the one hand, GDP will plummet in the short term. Economically, we’re not in a good place while we hope there won’t be a long-term impact. But the stock market and the economy are not the same thing and we’re seeing that play out now.
Not all stocks are in recovery mode though, and to be fair, they shouldn’t be. But MSFT should be rebounding for a few reasons. Let’s look at them now.
Covid-19’s Limited Impact on Microsoft Stock
When Microsoft reported earnings in late April, it crushed expectations. Revenue of $35.02 billion grew 14.4% year-over-year and beat estimates by $1.32 billion. Earnings of $1.40 per share topped expectations by 13 cents. More importantly though, the company had one very key sentence in its release:
“COVID-19 had minimal net impact on the total company revenue.”
In essence, while business and consumer spending took a hit in most categories, Microsoft’s business wasn’t one of them. As the work-from-home movement gains momentum and as demand for cloud-based services remains high, revenue still came in strong.
That’s exactly the type of certainty we want in our investments. It’s as if Microsoft went from a cyclical company to a secular one — and the stability in that revenue is what will help it retain a premium valuation amid the current volatility.
That said, Q4 guidance did come up a little short — with a range of roughly $35.85 billion to $36.8 billion versus estimates of $36.52 billion — but we’re really splitting hairs at that point. The point is, Microsoft’s revenue is secure and that’s all that matters in this type of environment.
Going Beyond the Income Statement
We know that revenue and income are safe for Microsoft stock, but what do the rest of the financial statements tell us?
In short, Microsoft is a juggernaut.
Current assets of $170.5 billion easily topple current liabilities of $58.7 billion. But digging a little deeper, we find out just how powerful this leverage is. For instance, MSFT has $137.6 billion in cash and short-term investments.
Not only are current assets about three times the size of its liabilities counterpart, but with almost $140 billion in cash, Microsoft has the ultimate flexibility. It could make several massive M&A plays. It could sit through a decade-long depression. But most importantly, it can thrive in either environment because of its enviable cash position (and that my friends, means it deserves a nice premium).
It’s not alone in its balance sheet strength. Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) also have strong financials.
Of the group, Microsoft stock is the second-highest generator of free cash flow. It’s also the second-best in terms of gross margins. However, it’s the highest generator of profit margins, turning 33.36% of all revenue into net income. That beats the next best competitor, Facebook, which generates 28.56% profit margin. Apple and Alphabet are closer to the 20% to 21% range.
In short, Microsoft is a profit machine with a massive cash balance.
Microsoft Stock Has a Strong Chart
As one might expect for a stock near its highs, the charts for Microsoft stock look great.
Uptrend support (blue line) and the 20-day moving average continue to guide MSFT shares higher. Resistance in the $187.50 area continues to temper the rallies, but so far, support keeps coming into play at higher and higher prices.
On a break over resistance, look for a challenge of the $190 area. That’s the all-time high from early February. Above that and $200 is in play. A break of trend support is where bulls get into some trouble — at least from a momentum perspective because momentum will be broken.
That will put the 50-day moving average in play and we’ll have to reassess.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL and GOOGL.