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Why Microsoft Stock Is a Relatively Safe Tech Stock to Buy

Luke Lango

Microsoft (NASDAQ:MSFT) stock has dropped recently as the stock market has tumbled on interest rate and trade-war concerns. MSFT stock, like the the S&P 500, presently trades about 4% off of its all time highs.

Why Microsoft (MSFT) Stock Is a Good Buy During Turbulent Times

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The reality of Microsoft stock is that, if the market keeps dropping on trade and interest-rate concerns, so will MSFT stock.

MSFT is not immune to these market headwinds. The company’s double-digit-percentage revenue growth rate is somewhat reliant upon healthy macro economic conditions, and those  conditions are deteriorating because of rising geopolitical tensions and trade uncertainty.

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Meanwhile, MSFT stock is also somewhat reliant upon rates staying lower for longer in order to support its rich valuation, and investors are unsure as to whether or not rates will stay lower for longer.

Thus, if the market keeps dropping on interest rate and trade concerns, MSFT stock will keep dropping, too, no matter what Microsoft news is reported.

But it will drop a lot less than other tech and growth stocks because. relative to other tech and growth stocks, Microsoft stock is significantly less exposed to interest-rate and trade headwinds. That’s because the valuation of MSFT stock isn’t that rich, nor is its business that dependent on favorable economic conditions.

Consequently, for investors who are looking for safety amid the recent market turmoil but also want growth, MSFT seems like the perfect stock to buy.

Microsoft Stock Isn’t Immune, But It’s Partially Shielded

Microsoft stock is not immune to interest rate and trade headwinds. But it is partially shielded, and this partial protection makes MSFT stock an attractive, “safe tech stock” to buy in turbulent times.

On the trade front, MSFT is partially shielded from trade headwinds because its core business is supported by non-cyclical  adoption tailwinds.

Specifically, Microsoft’s business is all about the cloud today. The company is capitalizing on the non-cyclical pivot from on-premise solutions to cloud solutions.

This pivot may slow somewhat as global economic conditions deteriorate and as enterprises pull back on IT spending and investment.

But the pivot won’t stop. Instead, enterprises will continue to shift to the cloud.The pace of the transition could even increase if the economy slows because cloud solutions provide significant cost savings relative to on-premise solutions.

As a result, Microsoft’s business won’t materially slow as a result of escalating trade headwinds. Instead, its business should remain largely steady and stable.

On the interest rate front, MSFT stock is partially shielded because its valuation isn’t that rich relative to other tech/growth stocks. MSFT stock trades at 25 times analysts’  average forward earnings estimate.

That’s rich. But it’s not that rich. Other big cloud stocks – like Adobe (NASDAQ:ADBE), Salesforce (NYSE:CRM), ServiceNow (NASDAQ:NOW), and Workday (NASDAQ:WDAY) – all trade at over 35 times analysts’ average forward earnings estimate.

Thus, if rates do creep higher, Microsoft stock won’t be pressured as much as other big-name tech stocks.

For these two reasons, MSFT stock is a relatively good buy in turbulent times. Indeed,  this scenario is already playing out. MSFT stock is presently only 5% off its recent highs. By contrast, every FANG stock is in correction territory. This relative outperformance of MSFT stock will persist.

The Long-Term Outlook of MSFT Stock Remains Compelling

The long-term bull thesis on Microsoft stock remains compelling, even amid recent market headwinds.

As stated earlier, Microsoft’s core cloud businesses are supported by non-cyclical cloud adoption tailwinds. These tailwinds may slow somewhat in the face of global economic uncertainty. Or they may accelerate, as enterprises  look to cut costs as times get tough. But these tailwinds won’t die. Only 20% of enterprise workloads are in the cloud today. Over time, that number will rise towards 100%. Thus, MSFT can easily sustain double-digit-percentage revenue growth for the next several years.

MSFT’s gross margins will continue to rise as its cloud businesses, particularly Azure, grow. Double-digit-percentage revenue growth should also be enough to increase its profitability.  Share buybacks will also be in play.

That combination should produce roughly 15% EPS growth. Reasonably speaking, then, Microsoft’s EPS could reach $12 by fiscal 2026. Based on a  forward PE multiple of 20, which is average for growth stocks, that equates to a fiscal 2025 price target of $240. Discounted back by 10% per year, we arrive at  a fiscal 2020 price target of roughly $150.

Thus,MSFT stock can rise meaningfully both over the next 12 months and the next five years.

The Bottom Line on MSFT Stock

Things are getting choppy in the stock market right now, and as they do get choppy, tech and growth stocks will get hit extra hard because they have ample exposure to trade and interest-rate headwinds.

But, relative to that tech and growth group, Microsoft stock will outperform in turbulent times because it has less-than-average exposure to the aforementioned headwinds. As a result, for investors looking to stick with growth  but also seeking some stability amid the recent volatility, MSFT stock looks like a good choice.

As of this writing, Luke Lango was long MSFT and ADBE. 

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