Buy the Dip in Microsoft

This post-earnings dip offers an opportunity to get in on a company firing on all cylinders.
Gregory BergmanApr 29,2021,19:00

I've long been long on Microsoft (Nasdaq: MSFT). And on this post-earnings dip, I am as bullish as I have ever been.

Microsoft nearly reached a $2 trillion market cap before its share price fell back down; the share price is now down around 4% since releasing earnings this week. The earnings in question did not disappoint; in fact, they showed that Microsoft, the company, not the stock, is on a tear.

Surpassing estimates on Tuesday, Microsoft reported fiscal third-quarter earnings of $15.46 billion, or $2.03 a share, up from $1.40 a share in the previous year, with profit buttressed by a $620 million net income-tax benefit. Without that tax gain, Microsoft would have reported earnings of $1.95 a share, still beating estimates. Revenue for the quarter was $41.7 billion, up from $33.06 billion in the same quarter last year.

Analysts on average expected earnings of $1.78 a share on sales of $41.04 billion, according to FactSet. Growth in the cloud computing segment was particularly impressive: Sales of Microsoft’s cloud-computing product, Azure, grew 50% in the first three months of the year. Gaming revenue was $3.5 billion, up 50% year-over-year, driven by 232% growth in Xbox hardware revenue. Xbox content and services revenue was up 34%.

So why did the stock fall more than 3% in after-hours trading immediately following the release of the report?

In a word: Expectations. After its stock had steadily climbed over the last month on the heels of earnings, analysts and investors may have been hoping for an even bigger beat.

According to MarketWatch, Evercore ISI analysts wrote in a note that, “the top line beat was perhaps a bit below buy-side expectations."

Still, the company did perform brilliantly, capitalizing on tailwind trends that do not seem to be slowing down.

“Over a year into the pandemic, digital adoption curves aren’t slowing down. They’re accelerating, and it’s just the beginning,” Microsoft CEO Satya Nadella said in a statement. “We are building the cloud for the next decade, expanding our addressable market and innovating across every layer of the tech stack to help our customers be resilient and transform.”

Microsoft, in my view, is a long-term buy. However, now that the company stands second only to Apple (Nasdaq: AAPL) in market cap at nearly $2 trillion (the stock came close to pushing the valuation that high before it fell), expectations have been raised by both analysts and investors. Also, the big tech company, boasting a higher market cap than Amazon, should begin to see the same kind of regulartory scrunity as its peers.

MSFT is no longer under the radar. But considering its bright future, buy this dip.

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