Is Microsoft Stock a Buy?

Microsoft (NASDAQ: MSFT) recently kicked off a great new fiscal year. The software icon, now 45, reported revenue and net profit of $ 37.2 billion and $ 13.9 billion in the three months ended September 30, 2020 (first quarter of l ‘fiscal year 2021). These figures represent increases of 12% and 30% respectively from a year ago. Under the leadership of CEO Satya Nadella, Microsoft has been able to sustain its decades-long growth through the cloud, and I wouldn’t be betting against the tech giant anytime soon.

But with the tech giant’s stock trading at over 30 times 12-month earnings, is it still a buy?

Sustainable growth, enviable margins

As in recent years, it was cloud-based services that once again led the way in Microsoft’s latest report. Overall, product-based sales were flat from a year ago at $ 15.8 billion, but services grew 23% to $ 21.4 billion, supported by all , from the burgeoning corporate video conferencing tool Teams to AI systems powered by cloud juggernaut Azure. A further breakdown of Microsoft by its three reporting segments showed the following:

• Productivity and business processes grew 11% year-over-year to $ 12.3 billion, thanks to Office 365 and associated subscriptions and a 16% increase in revenue from LinkedIn.
• Intelligent Cloud, which hosts the Azure public cloud computing business, grew 20% year-over-year to $ 13.0 billion.
• More Personal Computing grew 6% year-on-year to $ 11.8 billion, with Windows operating system revenue down 5% bailed out by 30%, and Xbox and Surface sales gains 37% .

What’s really impressive about Microsoft’s results is the long-term trend they reinforce: the power of technology to maintain strong profit margins. Revenue growth is one thing, but profit margins that continue to grow at an even faster rate are another. The company has countless competitors on its heels, but Microsoft has been able to maintain its pricing power through its transformation to the cloud and is moving slowly as each new dollar comes with less associated costs. This is an old company, but operating margins close to 40% are generally the domain of much younger and smaller companies.

Data by YCharts.

This old tech story illustrates why the myriad of small stocks in the cloud have such high valuations. Despite fierce competition, many years later, a tech company can remain in growth mode if it continues to allocate cash to the right projects at the right time. For Microsoft, the cloud was that catalyst that began to rekindle profitability five years ago, setting the stage for the next higher milestone in the years to come.

Not a bad bulwark to build a portfolio around

Coupled with its sustained growth in revenue and bottom line, Microsoft also continues to deliver ample cash to shareholders through its dividend ($ 3.86 billion in the last quarter, good for an annual return of $ 1. 1% at the time of writing) and share buybacks ($ 6.74 billion last quarter). It also has some of the deepest pockets with $ 138 billion in cash and short-term equivalents at the end of September 2020, offset by just $ 63.6 billion in debt.

The digital transformation is accelerating in earnest during the pandemic, providing a strong tailwind for Microsoft over the coming decade. It won’t be the fastest growing tech stock, but the stock price is higher for good reason. Slow and steady sales growth will lead to even higher earnings growth over time as the cloud continues to pay rich rewards. This tech company has been through a lot over the decades, and I think it will be great, whatever challenges loom around the next corner. For investors looking for a stable tech name to build a portfolio, Microsoft should be part of the equation.