Is Microsoft (NASDAQ: MSFT) a BUY?

Microsoft stock closed out 2019 at $157.70 a share, achieving a 55.3% return and far outperforming the market, which ended 2019 at 28.9%.

Is this growth driven by market exuberance?

Maybe slightly- 2019 also saw MSFT’s P/E ratio (Price to Earnings) climb from around 23 to nearly 30 by the end of the year. However, the growth was supported by a 10.9% dividend increase, which follows a trend of yearly dividend increases for more than a decade, as well as substantial revenue, EPS, and net income increases.

Why are people paying a premium in the form of higher P/E ratios?

One word: Azure. Only beaten by Amazon Web Services (AWS), Microsoft’s Azure is leading an entire industry called cloud computing. An excerpt from their own website:

"Cloud computing is when you access computing services — like servers, storage, networking, software — over the internet (“the cloud”) from a provider like Azure. For example, instead of storing personal documents and photos on your personal computer’s hard drive, most people now store them online: that’s cloud computing."

To give an idea of how big this market is and how fast it’s growing:

-In the first quarter of 2018 Microsoft, Amazon, and Google reported a combined revenue of $8.4 billion from cloud computing alone.

-In the first quarter of 2019 the three tech giants reported $13.3 billion in combined revenue from cloud computing (annualized, that’s a market worth over $50 billion).

-These statistics illustrate a market growth of over 58%.

How will MSFT perform in a downturn?

MSFT has a Beta (5Y Monthly) of 1.23, which means that for every dollar that the market increases or decreases MSFT will generally increase or decrease by $1.23 (this is a very watered-down explanation of beta, I suggest researching this topic more if you don’t understand it).

This statistic prevents the stock from technically being labeled a defensive stock; however, it’s suite of business tools are integrated closely into the operations of many large companies and aren’t likely to be subject to discretionary cuts.

Additionally, Microsoft not only maintained it’s dividend throughout the Great Recession in 2008, it actually posted a 10% dividend increase.

Overall, it might not be the most defensive stock available but might still be worth considering for an investor worried about recession.

Final Rating: BUY