Australia Strategy: Global leaders update - Featuring Microsoft

About the author:

Tom Sartor
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%.

Growth stocks have had a choppy ride since the onset of the pandemic

Growth stocks have had a choppy ride since the onset of the pandemic

Source: Morgans Financial, Iress

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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.

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