The market continued its surge from its March 23 lows on Wednesday, driven by recent shows of strength from Facebook (NASDAQ:FB) FB, Alphabet (NASDAQ:GOOGL) GOOGL, and Microsoft MSFT. Wall Street also seems pleased with signs that economies around the world are starting to figure out the best ways to begin reopening.
However, March economic data released Thursday wasn’t pretty and the millions of more Americans filed for unemployment benefits last week. And the full impact of the coronavirus isn’t projected to hit until the second quarter.
For example, our most recent Zacks estimates call for total S&P 500 earnings to fall 15.5% in the first quarter, with Q2 earnings now expected to tumble 34.3% (also read: The Coronavirus Pandemic and its Impact on Corporate Earnings).
Stocks could fall again and volatility might come back amid the broad economic uncertainty. This means that investors should be on the hunt for large-cap stocks, with businesses that are poised to grow and stay above the coronavirus pandemic fray…
Why Microsoft?
Microsoft might be too obvious of a choice for some, but that’s also part of the reason why it’s a safe play. MSFT on Wednesday topped our Q3 fiscal 2020 earnings and revenue estimates, with sales up 15% and earnings up 23%.
Cloud computing once again helped drive the historic tech giant, with Intelligent Cloud up 27% for the second quarter in a row. MSFT’s cloud segment pulled in $12.3 billion, which was the most of its three units. Meanwhile, its Office-heavy Productivity and Business Processes jumped 15%, with personal computing up 3%.
Microsoft’s cloud business is an industry leader alongside Amazon AMZN. Plus, its Office 365 suite remains vital to businesses, governments, schools, and consumers, and its Teams business is tailor-made for the current stay-at-home environment, as it fends off smaller rivals Slack WORK and Zoom ZM.
Without jumping into more details, all investors really need to know is that MSFT executives noted that “COVID-19 had minimal net impact on the total company revenue” in Q3. This was no easy task, and will likely become more important in the coming quarters.
MSFT shares are up 14% in 2020, against the S&P 500’s 9% downturn. Despite its recent climb, the stock still has room to run before it hits its 52-week highs and it’s trading at a discount compared to its own 12-month highs in terms of forward sales estimates.
Microsoft is well positioned to weather the current economic storm, as it held over $137 billion in cash, cash equivalents, and short-term investments at the end of the quarter. Plus, its dividend yield nearly doubles the 10-year U.S. Treasury note, while FB and GOOGL don’t pay a dividend at all.
MSFT returned $9.9 billion to shareholders via stock buybacks and dividends during Q3, which marked a 33% jump from the year-ago period. And it could continue to repurchase stock at a time when many companies have stopped their programs.
Bottom Line
Looking ahead, our Zacks estimates call for Microsoft's full-year fiscal 2020 revenue to jump 11.4% and another 11.1% in FY21 to reach $155.86 billion. MSFT’s adjusted EPS figures are projected to climb 16.6% and 11.3%, respectively over this stretch. These estimates mark the continuation of strong top and bottom line growth, especially for a company of its size and age.
Unlike fellow $1 trillion peer Apple AAPL, MSFT’s cloud-focused business model appears set to grow during the coronavirus economic downturn. Microsoft is currently a Zacks Rank #3 (Hold) that is part of an industry that rests in the top 23% of our more than 250 Zacks industries.
MSFT stock sits roughly 6% off its 52-week highs and even if shares fall again, longer-term investors might look back a year from now and think $178 a share for Microsoft is a steal. In the end, sometimes the easiest answer is the right one.
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