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Bull of the Day: Microsoft (MSFT)

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Microsoft (MSFT - Free Report) had to issue a guidance warning last week as the company gauged potential supply chain hiccups stemming from the coronavirus outbreak in China, a week after Apple (AAPL - Free Report) made a similar move.
 
Microsoft became the latest mega-cap technology company to warn that the coronavirus will negatively impact its current-quarter results. In a press release, the company said that the $10.75 - $11.15 billion revenue guidance for its More Personal Computing (MPC) segment (provided on January 29) -- which was a wider-than-normal range to provide for the virus impact -- would come in lower.
 
“Although we see strong Windows demand in line with our expectations, the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call. As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated. All other components of our Q3 guidance remain unchanged.”
 
In the December quarter reported on Jan 29, the MPC wing accounted for 35.8% of the company's total revenue. This segment also includes the Xbox video gaming products and services and internet search advertising.
 
PC Devices To Take a Hit
 
Wedbush analyst Dan Ives said on Thursday, “It fans the flames on coronavirus worries,” and “Apple and Microsoft now confirm the negative impact the Street had feared.” Other than the immediate impact on sales, there are inventory and other issues throughout the electronics supply chain that will impact a broad spectrum of companies in the sector.
 
Already some research firms have started cutting their outlooks for certain industries. Supply chain analytics firm Trendforce said that labor shortages and travel restrictions in China would have an impact on electronics/consumer items like smartphones, smartwatches and computer panels.
 
David Wong of Instinet LLC agrees: “We think there may be risk to demand in most electronic end markets, though we believe the end markets associated with consumer purchases might have the most potential downside. We remain cautious on the chip industry overall and selective in our chip and chip-equipment stock picks.” Moreover, he expects the impact to be prolonged: “We think that many investors, and companies, may have underestimated the risk of the current issues impacting electronics end market demand through 2020.”
 
On February 27, International Data Corporation (IDC) lowered its forecast for personal computing devices (PCDs), inclusive of desktops, notebooks, workstations, and tablets: "According to new projections from the Worldwide Quarterly Personal Computing Device Tracker, overall PCD shipments will decline 9.0% in 2020 reaching 374.2 million by year's end."
 
The IDC forecast was attributed not just to the spread of COVID-19 "hampering supply and leading to reduced demand," but also their estimates for the Windows 7 to Windows 10 transition creating tougher year-over-year growth comparisons. 
 
The Case for Buying MSFT Up to 28X EPS
 
Given all this bad news, MSFT shares getting back to pre-December quarter levels in the $150s made the stock very attractive. On Friday, I found the panicky sell-off in big Tech so appealing that I bought the ProShares 3X Bull leveraged ETF on the Nasdaq 100 (TQQQ - Free Report) just to quickly "grab a seat" on the deeply over-sold bull train.
 
And on Monday morning, I chose MSFT for our weekly Top Stock Picks video for an unbeatable combination of attributes...
 
1. "Port in a storm" safety and stability as enterprise tech dominator
 
2. Reliable sales and earnings growth of 10-15% each
 
3. Growth of innovative new platforms like Teams for remote work
 
Regarding the impact of China supply chain issues, the company hadn't planned to release the new Surface Duo for the Android OS until later this year. And while there is chatter they might do it earlier because this version would only be 4G compatible, investors don't seem too worried because they see the long-term trajectory of the MPC unit.
 
Jefferies analyst Brent Thill, in a 2/27 research note titled "No Immunity Even for the Elite," wrote "We're adjusting our estimates after MSFT announced that it would not achieve its guidance for its More Personal Computing segment this quarter due to the ongoing impacts of the Covid-19 health emergency. The revised expectations were solely due to lowered Surface and Windows OEM expectations and there were no other changes to guidance. We view this as a temporary issue and not indicative of the demand for MSFT products." Thill maintained his $195 price target on MSFT while trimming EPS slightly for the first half.
 
And on March 1, Dan Ives -- who I just had as a guest on the Mind Over Money podcast last month -- wrote this to investors...
 
Does coronavirus negatively impact the supply chain, cause massive demand uncertainty in the near-term around consumers/enterprises, and ultimately add a major risk profile to valuations and tech stock multiples that has just been rapidly factored into the market over the last week? The answer is a clear YES. However, does coronavirus massively disrupt/erase the long-term transformational bullish trends of cloud computing, 5G, EV, streaming, and cyber security for the next few years? The answer in our opinion is a resounding NO.
 
To hear Dan opine on this "unprecedented tech bull market driven by themes such as the enterprise move to cloud computing, a transformational 5G super cycle, EV auto demand inflection, streaming cord cutting paradigm shift, and cyber security all representing some of the major game changing trends poised to change the consumer and enterprise landscape for the next decade," check out our interview here...
 
 
Investors who missed the great rallies to new highs in Apple and Microsoft this year have been wondering why, and wishing they listened to Dan Ives all last year. And these gems remain among his top stocks to accumulate during this correction. Tesla (TSLA - Free Report) is near the top of his shopping list too.
 
Big Data Will Boost Cloud Revenues Over $40 Billion
 
Finally, it's worth noting that Microsoft's primary growth driver won't be impacted by global slowdown worries, with Intelligent Cloud (IC) growing at over 20% last year and likely to repeat in 2020. Here's what my colleague Dan Laboe wrote in his profile two weeks ago...
 
Microsoft has become the largest publicly traded company in the US because of its best-in-class management team that has been able to stay ahead of the competitive curve for decades. Microsoft was the largest company by market cap at the turn of the millennium, and 20 years later, this enterprise has taken the helm once again.
 
This software giant has been a role model for tech start-ups around the world. Microsoft has controlled the computer OS market for decades and is now taking control of the cloud computing market. The effective transition from on-premise software to cloud-based systems has brought this legacy firm back to its place at the top.
 
Microsoft’s new subscription-based revenue drivers, whether it’s Microsoft Office or one of its many cloud services its offer, has allowed this enterprise to grow out its sales by reliable double-digit percentages YoY. Microsoft offers customers Infrastructure-as-a-Service (IaaS) through its platform, Azure, competing in this very lucrative but quickly saturating business with tech giants like Amazon (AMZN - Free Report) and Alphabet (GOOGL - Free Report) .
 
The $50 billion IaaS industry is proliferating, and more businesses see the benefit of outsourcing their tech infrastructure. Amazon’s AWS has controlled the space as an early mover on cloud computing, but Azure is slowly but surely taking market share. Azure is in an early stage of development compared to AWS, but it is being offered at a fraction of the price, growing at double the rate, and analysts are calling it best-in-class.
 
(end of Dan Laboe's commentary)
 
Bottom line: In Microsoft's leading position in these technologies, large investors will continue to find safe harbor in its steady growth. And in a strong bull market, Microsoft shares will very likely ascend over 30X this year's projected $6 EPS.
 
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