In times of volatility, smart investors are looking for bellwether investments that will stand the test of time. During recessions and calamities, people tend to move away from sexy fly-by-night operations, preferring companies with solid fundamentals instead. One such company is Microsoft (NASDAQ:MSFT). Microsoft stock has the performance investors are looking for in these trying times.
In the current environment, Microsoft is an outlier because it’s down less than 15% year to date, while the S&P 500 has lost over 40% in value during the same time.
Main reason for that is its non-reliance on traditional lines of business that form the fulcrum of services offered by manufacturing and infrastructure firms.
That’s not to say that MSFT will remain unaffected as a stock; however, I do think that the company will not have the same issues as some other firms due to its diversified suite of products.
Microsoft is very much in the box seat at this point. The company is likely to thrive in this environment, considering several applications like Skype are critical in work from home structure. Apart from that, the American multinational company has a pristine balance sheet and excellent reserves to call upon in this moment of crisis.
So without further ado, let’s look at some of the reasons why Microsoft is the stock to lead us out of this pandemic.
Microsoft Stock: Not a One-Trick Pony
It’s no secret that Slack (NYSE:WORK) and Zoom (NASDAQ:ZM) have significantly benefited from the push to work from home. Still, the numbers seem less pronounced in the case of Microsoft, because the company is a bit more diversified. However, its Office 365 suite remains the highest contributor to revenues by far, and that is unlikely to change with the company offering an enhanced and more robust renamed system.
Microsoft 365 will have several additional AI-based features that will help accentuate the fact that the suite is not just for office purposes. We don’t want this article to become a marketing piece for the forthcoming platform. Still, there are a lot of neat features that the company will roll out, such as a counter to Grammarly and Microsoft Edge, the company’s browser, which has a host of new security features added that will significantly help in managing your sensitive information online.
Revenue Is Vanity, Profit Is Sanity, But Cash Is King
It’s tough not to be amazed by how solid the American multinational technology giant is in terms of cash flow, despite its commitment to reward shareholders through dividends and buybacks. Microsoft’s cash balance is above $100 billion and is showing no signs of slowing, as the company keeps on generating more than $50 billion in cash flow from operations every year. Any company with that kind of liquidity cushion can weather any storm, Covid-19 included.
After the Storm
Certain companies will forever feel the effects of the virus and may never fully recover. These include casinos, hotels, and the airline industry. Any company that is dependent on physical contact is expected to hit a brick wall for the foreseeable future. It’s tough to say that the worst of the pandemic is behind us, and if the crisis is prolonged, it will lead to substantial devaluation for every company, and Microsoft is no different. In that case, expect the company to increase cash as a percentage of its market capitalization for the foreseeable future. Let’s be fair, the company is not going to stop making money any time soon, and with products like Office, Skype, Teams, and LinkedIn, you can rest assured that it will continue to be a cash king for many quarters to come.
It’s important to shine some more light on Teams before we wrap up here. Although we see a significant boom in subscription numbers for the product, the platform is a long-term play for Microsoft, considering that many companies will discover that a lot of the work they do can be performed from home without any substantial change in productivity.
Clear Sailing for Microsoft
Microsoft posted revenues of $36.9 billion in the second quarter, an increase of 14%, a very healthy return that is only going to get better when numbers for Teams factor into the later quarters. Cash balance, as discussed earlier, is excellent at $134 billion, and the company is working with just $70 billion in debt, a differential of $64 billion. Any way you slice it, its good to be Microsoft at this point, and the share price is echoing that sentiment.
Suffice it to say we are relatively bullish on the Microsoft stock, and there are plenty of reasons why that is so. The company has very stable lines of business in the current environment, has plenty of cash to pay shareholders, and Microsoft 365 is also something to look forward to in the current climate as fears of a recession cool the markets.
Jerome Powell can do what he could in these circumstances with rate cuts, and the stimulus package from the Trump administration certainly did well to quell market concerns. Still, we have to face facts; the broader exchanges will need time to recover from the crisis. The good news is that MSFT seems to be an all-weather stock that should sail through the pandemic, and is also a healthy stock looking ahead as well.
As of this writing, Muslim Farooque did not hold a position in any of the aforementioned securities.