Don’t Ignore Big Tech Stocks
Investors like to hunt for smaller, lesser-known companies, but sometimes the best opportunities are hidden in plain sight.
One of the appeals of finding under-the-radar tech stocks is that, because they aren’t as well known as the more established players, they might have lower valuations. At the same time, by not being a big player, a smaller tech stock has the potential to deliver larger returns if it makes it into the big league.
But the blunt reality is, investors have so much appetite for growth these days that even the smaller tech stocks are getting expensive. Some investors might wonder whether the growth is already priced in. Plus, not every small tech stock will become a big player, so just like with anything in the investment world, the higher the potential return, the higher the risk.
And that means it could be worthwhile to look at the more obvious choices from Big Tech. Sure, these companies aren’t exactly cheap, but with their established market positions and continued business growth, I believe the opportunity for long-term investors to profit still exists.
Check out Microsoft Corporation (NASDAQ:MSFT), for instance. The company has been around for more than four decades and has deeply entrenched positions in its operating markets. With a market capitalization of about $1.9 trillion, some might say that its future potential is limited. And yet, Microsoft still churns out solid growth rates.
Just take a look at the company’s latest earnings report and you’ll see what I mean.
In the third quarter of Microsoft’s fiscal year 2021, which ended March 31, the company generated $41.7 billion of total revenue, representing a 19% increase year-over-year. Its adjusted earnings came in at $1.95 per share, up by 39% from the year-ago period. (Source: “Microsoft Cloud Fuels Third Quarter Results,” Microsoft Corporation, April 27, 2021.)
These numbers outperformed Wall Street’s expectations. On average, analysts were projecting adjusted earnings of $1.79 per share on $41.0 billion of revenue.
Microsoft operates through three main segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. Each of these segments delivered double-digit-percentage revenue growth.
In the Productivity and Business Processes segment, which includes “Office,” “LinkedIn,” and “Dynamics,” revenue grew 15% year-over-year to $13.6 billion in the March quarter. Notably, revenue from LinkedIn surpassed the $3.0-billion mark over the past 12 months. (Source: “Microsoft FY21 Third Quarter Earnings Conference Call,” Microsoft Corporation, April 27, 2021.)
The More Personal Computing segment, which includes “Windows,” gaming, devices, and search advertising, grew its revenue by 19% from a year earlier to $13.0 billion. Gaming was particularly strong, as “Xbox” content and services revenue increased by 34%. Moreover, there are now more than 1.3 billion monthly active devices running Windows 10.
Over the past few years, cloud service providers have entered the main stage of the tech arena. So unsurprisingly, the Intelligent Cloud segment has been a highlight for Microsoft Corporation. In the reporting quarter, revenue from the Intelligent Cloud segment rose by 23% year-over-year to $15.1 billion. Notably, revenue from “Microsoft Azure” surged by 50%.
And because most of Microsoft’s services are essential to businesses and consumers these days, the company can earn recurring revenues and profits.
Looking ahead, management expects the company to generate $43.6 billion to $44.5 billion in total revenue for the current quarter. At the midpoint, that would translate to a top-line growth rate of 15.9%.
And here’s something that most smaller tech companies can’t do: return cash to investors.
The up-and-coming players often have to reinvest their profits (if they have any) to expand their presence. While Microsoft Corporation also invests for the future, its mature business and established market position mean shareholders can be rewarded today.
In the March quarter, the company spent $5.8 billion on share repurchases and paid $4.2 billion in dividends. So in just three months, Microsoft managed to return $10.0 billion to investors.
Microsoft Corporation (NASDAQ:MSFT) Stock Chart
Chart courtesy of StockCharts.com
Microsoft stock had a solid bull run over the past year. But after the company’s most recent earnings report—which, as mentioned earlier, beat Wall Street’s expectations—the market didn’t react in a bullish manner.
Since Microsoft Corporation released that earnings report, MSFT stock has fallen by more than five percent. Because the company’s fundamentals remain solid, this pullback could represent an opportunity for growth investors.