Microsoft’s Durable Big Tech Advantage Should Be Clear From Its Q2 Report

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  • Reports Q2, 2019 results on Wednesday, January 30, after the market close
  • Revenue Expectation: $32.49 billion
  • EPS Expectation: $1.09

One thing newbie investors often overlook is that companies with a lot of cash, a wide economic moat and sticky services are the businesses best positioned to weather any storm. This statement is totally on point for Microsoft (NASDAQ:MSFT), currently the world’s most valuable company by market cap.

Microsoft's Durable Big Tech Advantage Should Be Clear From Its Q2 Report

MSFT Weekly 2016-2019

Though its shares took a hit when the broader market selloff intensified during the past quarter, Microsoft was still among the few big tech companies that showed investors they’re here to stay.

Taking into account the past year’s extreme market volatility as well as headwinds from political missteps, trade wars, and doubts about U.S. and global economic growth, Microsoft shares—which closed on Friday at $107.17—are still up 14% over the 12-month period. Since we last wrote about Microsoft in October, the stock has outperformed the broader market.

We believe this strength will once again be on display when Microsoft releases its FY 2019, second quarter earnings report on January 30. Earnings per share are forecast to grow about 14%, to $1.09 a share from a year ago. Sales are expected to surge 12% to $32.49 billion, according to analysts’ average forecast.

The primary point-of-focus for investors will be how Microsoft is performing in the growing cloud computing market where it competes against Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL), Google’s parent.

Cloud Segment Powering Growth

So far, the company has successfully benefited from the bet made five years ago by the company’s CEO Satya Nadella, when he invested heavily in data centers and other infrastructure to help corporate customers run applications and store their data. The growth in this market continues unabated for Microsoft, powering its operating income.

Indeed, the cloud computing market is expected to grow from $285 billion in 2017 to $411 billion by 2020. That segment alone is big enough to drive the company’s revenue growth for the next three to four years, according to Microsoft executives.

Microsoft, which runs the biggest cloud business after Amazon, may see its operating income rise 18% relative to a 13% increase in revenue for the same period a year ago. As well, that pattern should continue for the March quarter, according to Wall Street estimates.

Adding to the appeal of Microsoft as an attractive investment during an uncertain economy is its rock-solid dividend and excellent track record on payouts. Since 2004, when the tech giant first began paying a dividend, its payout has swelled more than four-fold. Microsoft’s current annual dividend yield is 1.7% with a quarterly dividend of $0.46 per share.

Companies that pay regular dividends are in a much better position to withstand selling pressure versus those that don’t. Indeed, dividend-paying stocks are less volatile in a bear market since they provide recurring income to shareholders. And Microsoft’s dividend growth has been supported by increasing free cash flows and a low payout ratio of 40.62 which means there’s a long runway for payout increases.

Bottom Line

As investor jitters about the global economic outlook and the longevity of this aging market bull increase, Microsoft’s fundamentals make it a safe bet in the tech space. Consumers may stop buying PCs, tablets and cellphones if some of their worst economic fears prove true in 2019, but it’s unlikely that large corporate entities will cut their spending on crucial IT infrastructure, such as the cloud.

We believe Microsoft’s earnings momentum will continue as it expands its market share in the cloud computing segment while maintaining its leading position in 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 run.

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