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Buy Microsoft When This Moment Comes

0 | By Michael A. Robinson

When we spoke on Tuesday, I noted that one of the 10 tools for coping with the new bear market is to put together a watchlist of great tech stocks you’d like to buy.

The idea here is to get set up for when the market turns our way again. At this point, I have no doubt that the market will rebound as it always has in the past.

But by definition, this choppy, news-driven market greatly increases the risk of getting in too early. To avoid doing just that, I recommend looking for tech leaders that you would like to own for the long haul.

That means giving each one a thorough checkup to make sure that prior to the correction, they had a great track record of earnings gains.

With that in mind, today I want to reveal a tech leader that I feel should be on everyone’s watch list…

A Miraculous Comeback

Now then, there’s a former laggard that had recently become one of the market’s top leaders. Along the way, it amassed a market value of roughly $1.4 trillion.

But when it became one of the first in the sector to warn of a sales decline brought on by the coronavirus and exposure to China, the stock got hammered.

From the time the S&P 500 entered into a correction on February 19 and March 23, Microsoft Corp. (MSFT) lost more than 27% of its value.

Here’s the thing; Mr. Softy is firing on all cylinders, and it gives investors multiple shots on goal. I’m talking about everything from defense and cannabis to the cloud and computing.

We can see the quality of its operations from its most recent earnings report, covering its second fiscal quarter.

Two words sum up its biggest boost during its second fiscal quarter ended December 31, 2019 – recurring revenue.

Its commercial cloud computing platform, Azure, and Office 365 helped smash expectations and send gross margins up 67%.

A Wedbush analyst recently told Investor’s Business Daily that the earnings report was a ‘masterpiece.’ And a Bernstein analyst wrote, ‘What more could you want?’

It bears noting that this was a company stuck in neutral for many years. That is… until Satya Nadella became CEO six years ago on February 4.

He reorganized and re-prioritized the company. He shut down unprofitable divisions and other operations that were not adding value to the current core business or the opportunities of the future.

He shifted the company from the old dependence on PC software to a cloud-based model that focused on subscriptions and recurring revenues.

And he built a cloud platform that has since become a fierce competitor to the once-dominant Amazon Web Services. Yes, Amazon remains the leader in cloud-hosting but Microsoft now ranks second and is coming on strong.

Ironically, as an organization, Microsoft’s leadership didn’t seem to know what to do with its Azure cloud unit before Nadella became CEO.

But as the saying goes, that was then and this is now…

Innovating and Consolidating

Make no mistake, Azure keeps gaining steam in its race with AWS.
Azure’s growth for the quarter was up 39%, or $12.5 billion, compared to the same quarter last year.

That’s very impressive given that most $48+ billion businesses don’t grow anywhere near that pace. And the cloud also promises even stronger gross margins once growth resumes.

Clearly, after warning that the coronavirus will affect the current quarter’s results, we can’t predict just what will happen here. But bear in mind that the most recent reporting period was the fourth straight quarter that gross margins had grown.

One of the things I really like about Microsoft is that it gives us more hooks than that, everything from PC software to AI to virtual reality and cannabis compliance to gaming. Even defense for that matter.

For instance, last October, Microsoft won the Pentagon’s massive Joint Enterprise Defense Infrastructure (JEDI) contract. That’s a 10-year, $10 billion deal to provide infrastructure and platform services for the Pentagon’s business and mission operations.

The goal of JEDI is to unite the entire military on one platform. To put every soldier, ship, and airplane on a single data framework.

And Microsoft’s JEDI deal is just the beginning. In November last year, its HoloLens augmented reality headset was chosen by the US Army as its heads up data display for the infantry.

Not only that, but the Office 365 suite is the top contender for the Pentagon’s multibillion-dollar Defense Enterprise Office Solutions contract, which would put all the armed services on the same enterprise network.

This is likely why Amazon Web Services lost the JEDI contract and won’t get far with its legal challenge. The Pentagon sees a single tech solutions provider as a more reliable and responsive partner.

Also remember, most of the US government already runs Microsoft software across its many agencies covering some two million workers.

The Crisis and Beyond

What Nadella has done in his relatively brief tenure is nothing short of amazing. He turned a company hopelessly tied to PC sales into one at the leading edge of some of the world’s top technology platforms.

No wonder earnings have grown an average of 17% over the last three years. If that rate were to continue, they would double again in roughly 4.25 years.

However, we won’t know the full impact of the coronavirus on Microsoft’s earnings until it reports results for the current quarter on April 22.

For the average retail investor, I would suggest not pulling the trigger until after that date. At that time, Nadella will likely offer guidance for future sales and earnings growth, allowing us to determine a fair price in this environment.

But if you take into account all the positive factors in this firm’s favor, you can see why I say Microsoft ought to be on every tech investor’s watch list.

And in the meantime, while the market is still uncertain, it can pay to look outside of traditional stocks for innovative tech investments that can avoid news-driven ups and downs.

My friends, Neil Patel and Don Yocham know about just such an investment that could revolutionize a $19 billion medical industry.

After all, with everything that’s been going on lately, it’s never been clearer just how important medical innovations can be.

So click here to learn all about this exciting new project they’ve found, and how it could pay off for you.

Cheers and good investing,
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Michael A. Robinson

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