Founded in 1975, Microsoft (NASDAQ:MSFT) has been a long-term technology sector performer, having been part of the Dow Jones Industrial Average since 1999. Microsoft had a near-monopoly with Windows in the 90s and 2000s until a revived Apple (NASDAQ:AAPL), and a transition to more mobile devices, weakened their stranglehold on the technology industry.

Compared to the evolution of market dynamics over the past decade, the changes in the past 6 months have been unprecedented and played havoc on global markets.  After plummeting in March, US markets have recovered almost to pre-COVID levels, led in large part by the technology sector.  Looking at 2020 year-to-date, the super tech giants ($1T+ Market cap) are all up: Microsoft is up 30%, Alphabet (NASDAQ:GOOG.L) is up 12%, Amazon (NASDAQ:AMZN) is up 59% and Apple is up 47%.

There’s a huge amount of uncertainty about what’s going to happen in the world in the next 12 months.  So, the question to ask is, what are the merits of investing in Microsoft?

Snowflake:

Starting with the Simply Wall St Snowflake, Microsoft appears to be a reasonable quality investment.  While it doesn’t appear like particularly good value, the dividend and health are both scored 3 out of 5.  This, in combination with the business’ fundamental attributes, suggests that Microsoft is in a reasonable position to handle a prolonged economic downturn.

At its current price of ~$208, Simply Wall St estimates Microsoft may be slightly overvalued – at a 7.9% premium to our estimate of fair value based on earnings forecasts from 32 analysts:

If we run a similar comparison against SWS estimates of MSFT’s peers, GOOG appears to be fairly valued, while AAPL appears 66% overvalued and AMZN 24% above our fair value estimate.  Against this metric, MSFT appears to be reasonably priced relative to peers.  This simple calculation provides a good comparison of how Microsoft’s current valuation sits against the other big tech companies.

Although MMMicrosoftAnalysis appears to represent better value than some of its peers, at 35x earnings the company is priced at a premium for a mature technology company.  The picture for insider selling appears to confirm this, as insiders have all been selling their stock, rather than purchasing more:

Growth opportunities

Turning to the underlying business, there is solid growth across the board, apart from search, because let’s be honest, nobody uses Bing.  Microsoft is organised into 3 divisions: Productivity & Businesses Processes (Corporate Apps and LinkedIn), Intelligent Cloud (Azure cloud computing, SQL server and GitHub), and More Personal Computing (Surface devices, Windows OEM licenses and search).

It’s no secret that the cloud represents a huge growth upside, with Gartner predicting the IaaS (Infrastructure as a Service) market to increase from $44B to $81B from 2019 to 2022.  According to this Canalys survey, while AWS is still the dominant player with 31% of market share, Azure is not far behind with 20% of market share. 

The major opportunity I see for Microsoft in the next 12 months is COVID driving traditional enterprises, who rely heavily on Microsoft for their traditional data centre software; to accelerate their cloud adoption and continue their partnership with Microsoft as they transition to migrating these workloads into the cloud.  

Conclusion:

It’s very difficult to navigate the current markets, and much of the world is looking to reduce its risk exposure due to the current level of uncertainty.  Microsoft represents a reasonably fair priced investment for people who are looking for a quality company in the tech sector, with the opportunity to capture additional upside as COVID and increased remote work accelerates the adoption of cloud by traditional enterprises.

There are too many aspects of Microsoft to cover in one brief article, but the key fundamentals for the company can all be found in one place – Microsoft’s company page on Simply Wall St:

Valuation: What is Microsoft worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether Microsoft is currently mispriced by the market.

Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Microsoft’s board and the CEO’s background.

Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

Freelance contributor Leon Poggioli has no investment in any company mentioned. Simply Wall St has no position in any stocks mentioned.  This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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