Australia Strategy: Global leaders update - Featuring Microsoft
About the author:
- Author name:
- By Tom Sartor
- Job title:
- Senior Analyst
- Date posted:
- 01 March 2022, 1:00 PM
- Sectors Covered:
- Junior (Emerging) Resources, Bulk Materials
- Our Asset Allocation update – 2022 Outlook details our recommended 24% exposure to international equities for investors with a Balanced risk profile.
- The highest quality US consumer stocks – Apple, Alphabet, Amazon, Microsoft – have corrected 10-20% despite delivering 4Q results above expectations.
- We further profile Microsoft as a dominant leader in consumer software, with macro-driven weakness offering a longer-term entry opportunity.
Profiling Microsoft (MSFT-US)
Microsoft is a global leader in enterprise and consumer software, best known for its Windows Operating System and suite of Office products (including Excel and PowerPoint).
Microsoft has several components across business (legacy Office, subscription cloud-based Office 365), cloud computing (Azure, Windows Server, OS and SQL Service), personal computing (search engines, Surface products such as laptops, tablets and desktops), and gaming (Xbox and other products).
Bull points
Microsoft is benefiting from businesses undergoing digital transformation, has pivoted from on-premise to cloud-based offerings, and has ~95% recurring revenue.
It has a diversified business mix exposed to varied structural tailwinds including the structural shift to cloud computing, Software- as-a-Service (SaaS) based productivity tools, online and multidevice gaming and digital advertising.
Microsoft's Office product enjoys a first mover advantage and is the dominant incumbent in productivity applications with ~90% market share. Azure offers several advantages such as hybrid capability, enabling enterprises to easily combine on-premise and cloud-based workloads, with capability to stage migration over time. Azure also has the broadest infrastructure in terms of local data centres.
Bear points
There is a risk the shift to a subscription-based model is unsuccessful and erodes Microsoft’s dominant position in productivity applications. A lack of presence in the mobile market could be a hindrance against leading technology companies.
There is a risk that Microsoft is unable to obtain a leading market presence in its key growth drivers such as Azure and Dynamics. The current environment of rising interest rates may also reduce the valuation appeal of long-duration growth stocks, regardless of business fundamentals.
Market view
(Factset): 41 out of 44 analysts rate MSFT a Buy, offering ~24% of capital upside. MSFT trades on a reasonable multiple (~31x PE) and has delivered 5-year revenue CAGR of ~13%, corresponding EPG CAGR of 23% and a 5-year share price CAGR of 36%.
Source: Morgans Financial, Iress
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Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely
resilient result given the extent of lockdowns in the period (~70% of stores
impacted) and the strength of the pcp (cycling 27% growth). Composition
comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%.
Overall, BAP stated that non-lockdown areas are outperforming expectations.
▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales -
1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling
+4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling
+36%). Within the Retail segment, online sales were +80% on the pcp. Stores
percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%.
▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with
Auto electrical/Truckline divisions ‘performing strongly’; and WANO
underperforming.
▪ GM pressure expected to be temporary: BAP stated GM was stable across
Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail
(~55% of FY21 revenue), driven by promotional and online pricing in lockdown
areas (we assume no margin pressure witnessed in non-lockdown areas). BAP
expect margins to revert once lockdowns ease.
▪ The cost base has increased vs pcp, a function of duplicated DC costs
(commencement of new VIC DC), and higher group and team member support
(covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.