Amid signs that investors’ faith in Big Tech stocks has been renewed and after Microsoft (NASDAQ:MSFT) stock reported strong fourth-quarter results, MSFT stock is a buy.
Additionally, the tech giant is likely to continue benefiting from the strong growth of its cloud unit and the work-from-home trend, while it should get a small boost from its acquisition of Activision Blizzard (NASDAQ:ATVI).
Renewed Faith in Big Tech
I believe that the Federal Reserve in general and its chairman, Jerome Powell, in particular, successfully managed to “thread the needle” following the central bank’s January meeting. Specifically, the central bank was able to both reassure equity investors and maintain a tough stance against inflation.
The Fed “walked the tightrope” with, Powell saying it’s “going to take some time” to lower the value of the Fed’s investments and proclaiming that, “there’s quite a bit of room to raise interest rates without threatening the labor market.”
Additionally, the Fed’s failure to say anything specific about reducing its balance sheet — along with other tough, anti-inflation talk by Powell — also managed to help the central bank accomplish its two goals.
In the wake of the meeting, I believe that equity investors feel reassured that the Fed is not going to, at least in the foreseeable future, cause tremendous amounts of Treasury bonds and mortgage-backed securities to come up for sale. As a result, their fears of stocks, including Microsoft, being “crowded out” by those instruments, i.e. investors buying those instruments instead of stocks, has greatly receded.
In the wake of the meeting, MSFT stock and its Big Tech peers have generally been fairly strong. For example, as of afternoon trading on Jan. 27, Microsoft had climbed 4.5% since the on close (Microsoft did report its fiscal second quarter results after the close on Tuesday, Jan. 25.). For their part, however, Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) was up 2.6% during the same period and Amazon (NASDAQ:AMZN) had climbed 0.3% during that time.
Microsoft’s Strong Results
The software conglomerate’s second-quarter top and bottom lines both beat analysts’ average estimates. The revenue of its More Person Computing unit easily surpassed the mean outlook, while the sales of its Intelligent Cloud division were exactly in-line with the average call.
“While the company reported that Azure and other cloud services revenue grew by 46%, that was slightly down from Q1 when Microsoft reported 50% growth in the category,” Yahoo Finance reported.
Despite the slight deceleration, for a large, mature business that’s number two in the sector, 46% year-over-year growth is certainly nothing to sneeze at.
In fiscal Q3, which we’re currently in, Microsoft expects the YOY sales of its More Person Computing unit to be almost 5% above analysts’ mean outlook.
Warning that the strength of Microsoft’s PC unit “might prove short-lived,” The Wall Street Journal noted that research firm International Data Corporation (IDC) expects overall PC sales to be unchanged in 2022 versus 2021. But I would not be at all surprised if driven by the work-from-home trend, which has been more resilient than many expected and by Microsoft’s Windows refresh, the unit’s revenue climb meaningfully in 2022.
The Activision Blizzard deal, as InvestorPlace columnist Louis Navellier recently noted, “is expected to bring {Microsoft} into competition with the video game giants and expand its already massive total addressable market.”
Indeed, the acquisition should enable the company to effectively market its Xbox consoles and its HoloLens augmented reality devices to the tens of millions of fans of Activision Blizzard’s games. Microsoft may even be able to find ways to incorporate HoloLens into Activision Blizzard’s games, making them a “must buy” for fans of those offerings.
The Bottom Line
With the Street turning upbeat on Big Tech names again and Microsoft poised to benefit from multiple, strong trends, now is a good time to buy the software giant’s shares.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Ford, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.