Microsoft Corp (MSFT)

He missed some tech stocks like MSFT and Meta--both can keep going with efficiencies, good balance sheets, cash flow and safety.

It deserves its re-rating. The report was a relief and its numbers beat: slightly better revenue and costs, making some disciplined margin improvement, and generated a lot of free cash flow. Generative AI is important, though they didn't stress it in the call. MSFT's beat benefits the market as a whole, given its 6% weight in the S&P. MSFT is on the verge of acceleration. Bulls say it's the way to play AI safely (cushioned by its various businesses), but bears say the valuation is too high and it isn't a pure-play AI. Her answer: the chart has climbed a wall of worry and has made a beautiful move higher after bottoming at the end of 2022. Also, the UK blocks Microsoft's takeover and she's glad--videogames are cyclical and is a tough business.

Strong momentum in generative AI. There's faith in Azure cloud re-accelerating. At the end of 2022, MSFT didn't suffer from weakening fundamentals, but rather was a victim of tax-loss selling for the megacaps. The report reiterated a strong fundamental company that's focused on the cloud. Shares remain 15% below its 15% all-time high from Nov. 2021, and entering 2023 saw under-allocations not seen for 12 years. Since then, investors have been rebuilding their positions as growth returns in vogue and yields fall off.

The problem with MSFT is that it trades at 27x 2024 earnings. Therefore, they need earnings growth in Azure and every business to support such a big multiple. She was wrong; she missed it.

This is the best day for MSFT stock since last Nov. 11 when it came off the bottom. The difference with today is that MSFT was already climbing going into yesterday's report. Now, the stakes are so high that it will be hard for MSFT to keep surprising to the upside. It's trading on a 20x on EV to EBITDA, within the three-year median, but above the 5-10-year average. Can MSFT keep delivering upside beats? Don't enter this stock today, but wait for a lower price. Kudos to long-term shareholders of which he is not one. Today is a spectacular move for a megacap. That said, we're going to have an AI bubble later this year. Money managers consider MSFT the safe way to play AI.

They made a splash when they announced AI, so they now must take market share from Google. AI will be highly competitive between them, though both companies could prosper. MSFT remains a core tech holding. Operating margins are over 40%. Maybe not chase it now, but pause and wait for a pullback.

 We think investors can look at metrics such as Forward P/E, as it factors in the near-term growth prospect into the valuation, which is currently around 28.6x.
In the last five years, MSFT has been trading at as low as 22x to 34x Forward P/E. We think the current valuation is fair.
Additionally, MSFT is an interesting case, because prior to 2017, the multiple on average is around 12x to 18x. 
The trading multiple has gone up significantly mainly because there was a significant change in the company’s fundamentals (change in CEO), which turns the story from a legacy software company to a high-growth tech company again. 
Overall, we think MSFT’s outlook is solid.
Unlock Premium - Try 5i Free

Undervalued. Two years ago, their cloud business did $60 billion in revenue, and $87 billion projected for 2023. Their PC business went from $54B to $59B last year, $53B projected this year, but compare that to today's 37% decline in PC sales overall. Business software grew from $54B last year to $68B this year (projected). He applauds MSFT's total embrace of AI with at least $10B of investment. Don't look at the market cap which has risen only $1.9 trillion to $2.1T. Rather MSFT has been taking cloud market share from Amazon.

Not a cheap stock, but consistent--you want to own it. It will hit a new high. He's very bullish big tech (with an AI kicker) as the economy slows down.

Owns shares in company but is not buying technology at this time.
Valuation is high given current share price.
Will buy more when share prices fall.
Expecting further growth in the business.
Good long term investment for next 5-10 years.
Excellent business with good long term prospects. 

Still in his top 5. Trimmed a bit to about a 3.5% weighting, as he had a 12-month price target of $290. He's holding on, as we're going into earnings season and things will change. Lots of interesting horses in the race. Thinks ATVI purchase will go through. Decent earnings. Buy in thirds here at $280, 265, and 250.