Microsoft: Time To Buy The Big Dog

Microsoft: Time To Buy The Big Dog

If Microsoft Was A Dog It Would Be Like … DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note’s date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications. How To Not Get Poor

As we noted in our recent article on Oracle’s Q3 earnings – which you can read here – we believe that the major indices have bottomed and we think we are in the early stages of a recovery. Nay, better. We think we are amidst a move to all time index highs – which we think can be achieved within twelve months.

So having spent the last few months battling the screen, selling our value names as they rose up, recycling the capital back into growth names as they fell, and harvesting some spare cash along the way, now what?

101 is what.

Time to buy Microsoft.

Now, we already own some of MSFT of course, but the risk/reward on offer right now is we believe very compelling and in consequence we have been building up our allocations in staff personal accounts and expect to continue to do so.

There’s likely not much we can tell you about Microsoft’s business – it’s all written a thousand times per week all over the internet and every other kind of media, so we shan’t try to recant it all here. But what we can do is point out just how strong the company’s numbers are, and then highlight the stock chart opportunity in the context of that fundamental strength.

Let’s take a look at the numbers. First, revenue down to net debt. Microsoft Financial Table I (Company SEC filings, YCharts.com, Cestrian Analysis) Same EBITDA margins and similar cashflow margins to value-software names like ORCL, but growing revenue at 21% on a TTM basis vs. 5% for the database king. Plus Microsoft has $79bn of net cash on its balance sheet whereas Oracle has $55bn of net debt.

Now let’s take a look at deferred revenue and remaining performance obligation (RPO). MSFT Deferred Revenue & RPO (Company SEC filings, YCharts.com, Cestrian Analysis) Microsoft’s contract book – the RPO balance – amounts to more than four-fifths’ worth of TTM recognized revenue, and is growing at a shade under 30% pa., vs recognized revenue growth of 21% on a TTM basis. All other things being equal that bodes well for a modest acceleration in TTM recognized revenue growth.

And that bodes well for the valuation multiples at which the stock can trade. Multiples today aren’t cheap – 21x cashflow is hardly value territory although we note that Raytheon ( RTX ) trades at a bigger cashflow multiple in exchange for no growth, as does L3Harris ( LHX ) (both stocks are among the value names we sold recently). But these multiples can rise if the market does recover and if Microsoft growth accelerates. And as you know, multiple expansion is the easiest source of free money going. Microsoft Valuation Multiples (Company SEC filings, YCharts.com, Cestrian Analysis) If this wasn’t a software company but just a walled citadel somewhere in Washington State, we would say that here we have one of the most successful small republics on the planet. The People’s Republic of Microsoft. $79bn of Uncle Sam’s finest in the bank. Growing GDP at 21% per annum. Current account surplus, every year, of 41%. Where do we apply for citizenship?

But this much you know already.

The catalyst for us to now be adding to our staff account holdings is the stock chart. (You can open a full page version, here .) MSFT Chart (TradingView, Cestrian Analysis) We […]

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