Microsoft: Q2 2019 - Solid Results
- Q2 2019 results: steady top-line and bottom-line growth.
- Microsoft is the best platform for the modern workforce.
- Very strong capital return program.
- Microsoft remains undervalued, for now.
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Simply put, the reason why I believe that Microsoft (NASDAQ:MSFT) is undervalued is that it delivers the two things which investors crave: predictability and double-digit earnings growth.
What's more, Microsoft not only continues to deliver steady earnings growth but also remains committed to returning excess capital to shareholders. And lastly, and debatably most important in the eyes of this author, investors are not being asked to pay up for this opportunity.
Q2 2019 Results: Strong Results
Microsoft's top-line grew 13% (constant currency) to $32.5 billion, while its bottom line fared even better and was up 14% (constant currency). Although, if I were to point out one blemish in Microsoft's Q2 2019 results, it would be the fact that Microsoft's free cash flow was down 2% YoY to $5.2 billion - although that didn't stop Microsoft from having a strong capital return program in Q2 (more below).
First Player Advantage - What Does It Mean?
In investing, sometimes we need some common sense, coupled with a little bit of financial savviness. Not a lot of financial savviness, but some.
Let's step back and think. Over time, which company will have the most trust from large enterprises to not only offer them cloud capabilities, but to go further, and offer them solutions? Microsoft, right? Granted, Amazon (AMZN) spotted the opportunity first - every investor knows that. But being first, when it comes to Amazon's AWS (and everything else Amazon related) is already priced into Amazon's market cap.
Besides, when it comes to technology, sadly, first-mover advantage is quite meaningless. Think of your first search engine? Or your first mobile? Or your first camera? All those companies have had their moment in the sun. My point being that coming first doesn't mean reigning the day.
What I'm trying to drive home is that there is something which means more than being first. What I want to drive home is loyalty. Why does Apple (AAPL) thrive? Because consumers trust that when they fork out for an Apple device, they are getting reliability. You want your device to work? Unquestionably? Apple delivers that, right? You know what you are getting when you purchase an Apple device. Same with Microsoft.
Commercial Revenue Annuity Mix
Microsoft's earnings results demonstrated that, once again, Microsoft's commercial revenue annuity mix was close to 90%. Why? Because Microsoft's software is just so damn sticky. What IT departments want is to fork out for something which works, any time, any day, and seamlessly too. To work from anywhere. This is what Microsoft delivers. Microsoft is a platform for the modern workforce to increase its productivity, through task-oriented, secure collaborations. For now, no company on the horizon is going to succeed in displacing this from Microsoft.
Terrific Capital Return
Moving on, Q2 '19 saw Microsoft return a resounding $9.6 billion to shareholders via dividends and buybacks. In other words, this quarter alone saw Microsoft return just over 1% of its market to shareholders.
As I wrote about in my recent blog, over time, I have become more appreciative of other investment styles. While I employ a deep value investment strategy, I certainly understand a buy and hold strategy. Accordingly, if I were to be a buy-and-hold investor, I would be sure to stay the course with Microsoft. Again, if Microsoft makes enough excess free cash flow that it can post strong growth and still have enough capital to return more than 1% of its market cap, that is certainly saying something.
Valuation - You Don't Get Quality Much Cheaper
Source: author's calculations, morningstar.com
Throughout the article, I have touched on the fact that Microsoft is highly free cash flow generative, asset light, and committed to a strong return of capital programme.
While I concede that Microsoft's guidance may have been middle of the road, one thing we can be sure of, Microsoft continues to be the flagship, go-to platform for the modern workforce.
From time to time, certain companies come in favor only to retrace, and many shall be restored that now have fallen out of the limelight.
One takeaway, if investing is about watching the downside and letting the upside take care of itself, I struggle to see how investing in Microsoft could be a risky endeavor as Microsoft continues to do what it does best - steadily grow.
Author's note: The only favor I ask is that you click the "Follow" button so I can grow my Seeking Alpha friendships and our Deep Value network.
Disclaimer: Please do your own due diligence to reach your own conclusions.
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