• Saahil Menon

Talking Stocks: Microsoft Inc.

Updated: Mar 27, 2020

Is this the one company that will stride through COVID-19?

With the cataclysmic spread of the coronavirus, over 77% of workers are now being forced to delegate tasks from home, with that statistic only increasing from here on.

To nobody’s surprise, the spread of this virus has caused a wave of fear that has affected stocks, currencies, economies and everything in between. Trillions of dollars have been lost in the market, and it’s repeatedly giving rise to the question… are any investments even safe right now?

While no company seems immune to this chain of events, some may be better at shaking-off the fears than others.

With Microsoft’s pervasive range of virtual products, it seems to be one of the few companies who’s revenues and profits may not be substantially harmed by the rippling of COVID-19. Hence, consider these 3 reasons to view MSFT as a bargain during this bearish period:

1. Higher Demand for Virtual Communications

Amid the series of remote-working conditions being placed – with Twitter, Apple, Google, and other MNC’s asking employees to work from home – there has been an unprecedented increase in the use of virtual tools.

According to The Motley Fool, the “Microsoft Teams” platform – a space where multiple individuals can interact and delegate projects – has experienced a surge in usage of over 500% in China. This level of increased demand for Microsoft products suggests that the company’s business model may not be harmed as significantly as other businesses, and in fact, may even increase, therefore putting it in the figurative “spotlight” for picking stocks during this market downturn.

2. Shift to Cloud

With cloud computing becoming a more prominent market every day, Microsoft has successfully captured the industry in terms of revenue and market share.

The company’s CEO Satya Nadella has pledged over $1 billion per year in cloud computing investments, the consequence of which would put Microsoft in a better place to take advantage of the growing industry shown below:

Figure 1: Forecasted growth of cloud-based services

Source: (Seeking Alpha, 2020)

Their lead in this space - and optimistic levels of growth - have prompted analysts to retain a $210 target price on this stock. This means that, assuming the market recovers in due time, we could be seeing MSFT gaining over 45% from its current share price of $140: a substantial gain for potential investors.

Key Point: While we - and most analysts - are quite optimistic about the future of Microsoft, it would be folly to disregard the short term impact of COVID-19. Poor market conditions and negative economic estimates suggest that the next few weeks/months may not see a rise in Microsoft prices. Nevertheless, once we see the markets again being driven by fundamentals instead of fear, we can expect some positive growth.

3. Raising Dividends

Despite a meltdown, there are still some positives to be picked from the rubble. The fallen stock price means that Microsoft’s dividend yield (i.e. the dividend amount per year divided by stock price) rises, and is now higher than the return from US Treasury Bonds (considered the safest investments).

1. Current US 10-Year Treasury Yield: 0.94%

2. Microsoft Dividend Yield at Price of $145 per share: $1.99/$145 = 1.37%

This means that the dividend-only return from holding Microsoft stock is now higher than the return of holding US government bonds. After considering that investors will also make a return from the capital gain here (i.e. when MSFT stock moves back up from $145 per share), it seems plausible that profit-seekers may move out of US Government bonds and into safe, blue-chip stocks instead.

This creates increased demand for Microsoft stock, and since they also hold the highest amount of cash-on-hand so far in 2020, betting on Microsoft seems like the most profitable option even during a time of economic uncertainty…

Key Takeaways:

1. Microsoft's virtually-based products have greatly gained demand in the past month, suggesting that their overall revenue and profitability may not be impacted as much as other businesses.

2. The market shift towards cloud infrastructure means that Microsoft has penetrated a growing industry, and is leading it simultaneously: both of which imply a relatively bright future for the company despite the COVID-19 impact.

3. The dividend yield of Microsoft stock is now higher than US Treasuries/bonds. This implies that investors may consider taking money out of safe government assets and placing them into blue-chip stocks like Microsoft. Here, they will get a better yield as well as a growth in the value of the stock long term: both of which could increase demand for MSFT stock.