Should Microsoft (NASDAQ: MSFT) Be In Your Portfolio For Q1?

With shares of tech giant Microsoft (NASDAQ: MSFT) coming off the back of a 70% run in the nine months since March, it’s not unreasonable for investors to take stock of the company’s prospects for the coming year. Despite taking a 30% haircut back in Q1, they’ve managed to put in a solid shift for 2020 as a whole and have moved with a nimbleness that belies their $1.7 trillion market capitalization.

Now, as we head into the final trading week of the year, their shares look set to finish up on the full twelve months somewhere around the 40% mark. And every indication is that they’re going to maintain that momentum into the first quarter of 2021 and beyond.

Fresh Momentum

In the days leading up to Christmas Eve, the folks at Citigroup placed a last minute present under Microsoft’s tree by way of an upgrade to their shares. They moved them from Neutral to a Buy while upping their price target to $272, suggesting upside in the region of 20%. Analyst Walter Pritchard was particularly bullish on the company’s Office 365 product and Azure platform, both of which he’s forecasting will see strong improvement to their revenue in 2021.

The former will benefit from the increasing acceleration in the digitalization trend while the latter stands to catch some seasonal tailwinds from the "relatively slow-moving enterprise IT" market. Pritchard also sees "cloud consumption growth staying higher for longer."

This will be a much-welcomed new voice in the bull camp, particularly as Azure had under-delivered in the company’s fiscal Q1 report released back in October. It’s worth noting that its revenue was still up 48% on the year, but analysts had been expecting a print on the other side of 50%. Given it had grown 50% in the previous quarter and 61% in the quarter before that, there were some real concerns around the continuing slowdown. This filtered through to Microsoft’s stock which has been trading largely sideways for most of the past four months. Citi’s comments will do much to reinforce the bull thesis that Microsoft has a long runway of reliable growth ahead of it.

Indeed, this was the argument from Bank of America when they reinstated Microsoft shares with a Buy rating two weeks ago. Analyst Brad Sills mapped out how Microsoft can "sustain low double digit in the coming 3-5 years," with their cloud platform, productivity suite, and Xbox revenue leading the way. Sills also drilled into the company’s low margin Azure and Office 365 offerings, noting that growth here could "offset COGS scale benefits near term," but thinks "operating expense scale is likely to drive stable 70 to 110 basis point margin expansion in the coming years."

Technical Analysis

So there are plenty of fundamental drivers to get potential investors excited and at the very least offer some food for thought. On the technical front, shares have been consolidating in a tightening range since September with lower highs and higher lows setting the stage for a breakout in the coming weeks. Based on the company’s performance this year and recent comment from the sell-side heavyweights, it’s hard to argue against that breakout being to the upside.

Microsoft can boast a compound annual growth rate of more than 32%, are one of the biggest and most established tech companies out there, and should be on every investor’s long term list at this point.