Portfolio manager Darren Sissons has nothing but praise for the tech giant Microsoft (Microsoft Stock Quote, Chart, NASDAQ:MSFT News) but with the stock at all-time highs, the company’s spectacular run won’t last much longer.
“It’s fair to say that most big tech companies had a fantastic 18-24 months. If you look at Microsoft’s chart, it worked really well,” Sissons, vice president and partner at Campbell, Lee & Ross, said in a chat with BNN Bloomberg on Wednesday.
“The cloud business has been a phenomenal winner for them and the company has really reinvented itself from a monopolistic company with subsidiary services on the sidelines,” says Sissons. “They have a huge cash balance sheet, and then they implemented a dividend.”
“[But] at these levels, I’m very reluctant to buy companies at 52-week highs, but I think the whole cloud services industry will continue to roll,” he said.
Microsoft has had a tremendous winning streak dating back a good half-decade, where the stock started 2015 at just over $45 per share and climbed steadily until it is now above the $150 mark. This includes a year 2018 that was not favorable for tech stocks, but where MSFT still managed an 18.7% return. For 2019, the stock is now up 50%.
The company’s latest earnings report is a sign of that success, where Microsoft beat analysts’ forecasts for revenue and earnings while continuing to generate superior growth from its cloud business. Delivered in October, Microsoft’s fiscal first quarter saw revenue jump 14% year-over-year to $33.06 billion from the consensus expectation of $32.23 billion, while earnings of $1.38 per share were also better than Street’s $1.25 per share.
For the first quarter, Microsoft’s Azure public cloud segment reported revenue growth of 59%, compared to a growth rate of 64% from the previous quarter, while revenue from commercial Windows products and cloud services increased. increased by 26%, against 12% a year earlier.
Sissons says investors should be careful with such a hot name, as Microsoft is held in numerous ETFs and index funds, which could have a quick trigger finger if the stock drops.
“I think that’s one of the driving forces. In December of last year, we saw a lot of ETFs doing a lot of big selling, so that’s obviously the downside you see,” Sissons said. “If the market corrects, ETFs will be huge sellers and that will negatively impact many big names in tech. This is the case with the bear.
“If you can get it to a decent level that would be good, but beware of companies that have had huge runs because runs don’t last forever and once they correct themselves and stabilize they can be dead money for a good period of time,” he added.
“For us, the valuation is too rich here and the run is too long, but if we see a correction it could be something I would look into. I think the fundamentals of the business are strong, but I don’t want to just not paying a high price for those fundamentals,” Sissons said.
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