Microsoft stock will prevail despite PC sales declining

<p>Shares of Microsoft (NASDAQ: MSFT) had records in 2019, but they are now trading in the range of $ 135 to $ 140. Remember that Microsoft stock recently reached above $ 190 in February 2020. It is safe to say that it has fell from there.

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The trend ended when market volatility deteriorated and the major indices, such as the Nasdaq Composite and S&P 500, slid lower.

Why should investors still like Microsoft stocks? The company reported a strong second quarter. But it could not avoid warning investors that they will not meet their third-quarter guidelines. This is because coronavirus from China hits Windows OEM and Surface sales.

Microsoft lowers third-quarter guidance

Microsoft initially forecast quarterly revenue between $ 10.75 billion and $ 11.15 billion from its personal computing device. But the supply chain is returning to normal operations at a slower pace than expected, so the blue-chip giant said sales from this segment will not meet expectations.

Related semiconductor vendors collapsed along with Microsoft’s inventory over the past month. Advanced Micro Devices (NASDAQ: AMD) has trouble justifying its valuation to investors. Nvidia (NASDAQ: NVDA) may experience lower sales of graphics cards during the quarter. And Micron (NASDAQ: MU), which sells memory and flash storage chips, may experience a temporary decline during the quarter.

Despite the long-term slowdown, Microsoft is charging forward in its other business units. In the second quarter, gross margins peaked at 22% on a profit of $ 24.5 billion. Operating profit increased by 35% to $ 13.9 billion. Its personal computer segment accounted for a larger share of Microsoft’s revenue ($ 13.2 billion out of $ 36.9 billion).

But it is important to note its strength in other devices. Microsoft’s cloud and productivity segments increased by 27% and 17%, respectively.

Strong growth is ahead

Investors may extrapolate that positive cloud and software revenues will continue for the rest of 2020. The global economy is likely to stagnate due to the coronavirus outbreak.

Conversely, Microsoft equities will continue to reward their investors due to their strong cash flow. The company returned $ 8.5 billion to shareholders through share repurchases and dividends. And unlike other overvalued companies whose cost growth exceeds revenue growth, Microsoft has operating costs under control. Costs rose just 9% year-on-year to $ 10.7 billion. The company mainly invested in LinkedIn and cloud technology.

Office productivity software requires minimal additional investment. As long as customers switch to cloud services and Office 365, Microsoft’s revenue will continue to grow.

Risks with Microsoft Stock

Weaker Windows OEM operating system sales are likely to hurt upcoming quarterly results. But if the world proves resilient and causes the virus outbreak, the business may soon resume normal operations. China “runs back slowly” after weeks of a lockdown. This suggests that Microsoft’s PC segment will also return.

Investors may venture into Dell Technologies (NYSE: DELL) or Intel (NASDAQ: INTC) pending computer sales to return later this year.

In addition to the affected segments, Microsoft’s Azure cloud services division offers growth. Revenues increased by 62% from last year.

The conclusion of Microsoft Stock

Analysts have an average price target of almost $ 200 per share. And almost all (25 of 26) analysts rank the stock as a buy.

Do-it-yourself investors can choose to build their fair value model on Microsoft stocks. Assuming a 7.5% discount rate and a 14.1-fold terminal EBITDA multiple, the stock is worth $ 168.86. Here are the assumptions:

Measured Values ​​Conclusion Discounted 7% -9% 7.5% Terminal EBITDA Multiple 13.1x-15.1x 14.1x Fair Value $ 150.46- $ 182.30 $ 168.86

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Chris Lau is a contributing author to InvestorPlace.com and many other financial websites. Chris has over 20 years of investment experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace at Seeking Alpha. He shares his stock choices so that readers get original insights that help improve return on investment. At the time of writing, Chris had no position in any of the above securities.