• Stock Deconstruction

Can Microsoft’s share price outperform in a bear market?

Can Microsoft’s share price outperform in a bear market?

Microsoft’s share price has been battling the wider market calamity, so far outperforming wider benchmarks driven, in part at least, by the recent strength of its Azure cloud services

The Coronavirus-induced selling spree continues. Monday 16 March, the S&P 500, the NASDAQ and the Dow all fell by more than 12%. But despite the market upheaval, Microsoft's [MSFT] share price is weathering the storm. As of 24 March, Microsoft’s share price was down 15.3% in the year-to-date, compared to the S&P 500’s 29.3% drop over the same period.


Microsoft's year-to-date drop, compared with S&P 500's 29.3%


Its steady-for-a-pandemic share price is no doubt underpinned by the solid performance the company has delivered in recent months.

In 2019, Microsoft’s share price increased by 58.4% – returning more than twice as much as the S&P 500, which was up by 30.4% by the end of last year. A big part of this has undoubtedly been the blistering growth seen in the cloud services market, which Microsoft has capitalised on through its Azure service. 

In the face of increasing global macroeconomic concerns, Azure has continued to log impressive revenue increases — 62% growth in the last quarter. While down from the highs of 76% in 2018, the cloud services segment has maintained a steeper growth trajectory than the 58% growth rate Goldman Sachs analysts had predicted. 




Good numbers in bad times

Azure cloud services, introduced in 2010, launched into a market already dominated by behemoths such as Amazon [AMZN], Apple [AAPL], Oracle [ORCL] and Alphabet [GOOG]. Not only has Azure found its place in the market, it is bolstering Microsoft’s share price performance as a whole (although it is important to note that Microsoft does not reveal Azure’s financials beyond publishing revenue growth on a quarterly basis). 

While markets have tumbled as a result of the coronavirus outbreak, Microsoft’s 1.4% dividend yield sits higher than the 10-year US Treasury’s 1.06% and competitor Apple’s 1.28%. On 9 March, Microsoft’s board of directors declared a quarterly dividend of $0.51 per share, payable 11 June 2020. 

Microsoft has logged impressive stats, with a total revenue (TTM) of $134.25bn (as of most recent quarterly update). Microsoft also has a trailing P/E of 28.97 and forward P/E of 26.53 - decent value in a sector traditionally littered with sky-high valuations.


Microsoft's total revenue (TTM)


With its 11.38% return of assets, 43.83% return on equity and 13.70% quarterly revenue growth (year-on-year), it’s understandable why analysts at Zacks have rated Microsoft a strong buy. 

Needless to say, this should all to be taken with a pinch of salt as Q3 earnings will likely have a different tone, in accordane with the coronavirus concerns shaking the global economy. Nonetheless, Zacks also estimates Microsoft’s sales will jump 12.7% in 2020 and another 11.7% in 2021. Adjusted earnings are also projected to see a surge of 18.3% and 12.6%, respectively. 

Predicted market performance for the next quarter will likely be re-evaluated, with Microsoft already having noted in a 26 February press release the potential for lower revenue and narrower operating margins due to global economic uncertainty and “geopolitical conditions that may disrupt [the] business”.

Microsoft further warned Wall Street: “Although we see strong Windows demand in line with our expectations, the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call. As a result, for the third quarter of the fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated. All other components of our Q3 guidance remain unchanged.” 

“...the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call. As a result, for the third quarter of the fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated” - statement from Microsoft

How does this compare to direct competitors? 

Apple and Amazon, two of Microsoft’s biggest competitors, both have almost double the total revenue (TTM) that Microsoft has to play with — $267.68bn and $280.52bn respectively. This is reflected in their steeper share prices, with Apple averaging a revenue of $58.99 per share and Amazon a whopping $567.86 per share. 

The difference, though, is that their other margins are far narrower. Microsoft, meanwhile, is seeing more significant growth in returns across the board. 

For example, Q2 reports show that Amazon logged a 4.64% return on assets (TTM) –significantly lower than Microsoft’s 11.38% – while Apple has 8.90% quarterly revenue growth (year-on-year) compared to Microsoft’s 13.70%.


Amazon's return on assets (TTM) as of Q2 reports, compared with Microsoft's 11.38%


Supply chain restrictions and international quarantine lockdowns have resulted in huge ramifications in global businesses when it comes to physical products, which will likely mean companies like Amazon and Apple will be hit harder by the COVID-19 pandemic. 

Apple has been shutting stores across the world for a minimum of two weeks to combat the rapid spread of Coronavirus. The corporation has also warned there will likely be a shortage of iPhones in the ensuing months as a result of China’s slowdown in manufacturing – this will undoubtedly have a huge impact on market performance. 

Smaller businesses working for these big names will also be hit. Amazon’s third-party vendors will be hit by Jeff Bezos’s decision to stop stocking and shipping non-essential items until 5 April (with the possibility of extension) across the US and Europe. The ripple effect has yet to fully take hold in the stock market, but experts predict the impact will be heavily felt. 


Strength in the cloud

This is when Microsoft’s Azure comes into its own. As a cloud-based business, it will likely remain less affected than companies that have more reliance on their supply chain and physical goods. In fact, with people restricted to their homes, the need for reliable online services and support will actually increase. 

Microsoft’s Q3 results will therefore rely heavily on Azure continuing to outperform expectations.

Despite the inevitable revision of earnings projections in a shaky bear market, the outlook for Microsoft remains positive. Analysts say it is likely revenue growth will slow, but that Microsoft is definitely still an attractive option for investors looking to safeguard their money in an increasingly unstable market. 

According to CNN Business, Microsoft holds a consensus buy rating from 28 analysts. Its average price target is currently $200, representing a potential 47% increase on 23 March’s closing price of $135.98.

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