Michael Baxter examines Microsoft in the current climate.
Could Microsoft be the winner as tech sentiment turns bad?
Sell! It’s been a time for selling tech stocks, not just Facebook. Amazon has taken a pounding too, as has Alphabet, Netflix, the whole gang. But the problems, even those experienced by Facebook, seem quite mild compared to those at Tesla. By contrast, some analysts have become bullish on Microsoft.
It could be said that the valuation of some companies is up in the clouds. Well, that may be so, but one thing is for sure, with some techs, their valuation is literally in the cloud.
The thing about the cloud is that for business it turns IT from a fixed to a variable cost. You can turn your usage of the cloud up and down. And in this era of digital transformation, when companies are supposed to be able to move fast, create ideas for new products, produce basic versions they can test, and then either develop further or scrap - that’s what they call lean start-up model - the cloud is fundamental.
And for Amazon and Alphabet, the cloud is a key part of their revenue model. For analysts at Morgan Stanley, however, its cloud products could catapult Microsoft to beyond the one trillion-dollar valuation before anyone else can get there.
But first, consider sentiment and the current tech sell-off.
We are in the early stages of the so called Fourth Industrial Revolution, where AI, the Internet of Things, robotics, nano technologies, 3D printing, augmented and virtual reality, super materials such as graphene, computer modelling, drone technology, energy storage, DNA editing, stem cell research and big data are expected to converge and change the economy, business and even society in the most profound way.
You may disagree with the above. I am of the strong belief that it is true. This creates dangers and opportunities, but for investors, the best bets may lie with companies that can make this happen. The giant techs are the obvious contenders. That is why their valuations are so high.
But the fourth industrial revolution road is not smooth. I reckon it all began in the 1990s with the dotcom boom and since then we have already seen two crashes. The dotcom crash occurred because tech hype ran away with itself. The link between the 2008 crash and technology is subtle, but it is there - post dotcom crash, people turned towards property, tech meant only very modest inflation and low interest rates, but created growing inequality, the conditions that led to the 2008 crash grew out of these factors.
And we will, at some point, get another crash. In its aftermath, there will be an awful lot of negative sentiment towards techs.
We have not just witnessed a tech crash, more a wobble, but who knows what it will lead to, especially given rising interest rates. Recent falls partly relate to concerns over how personal data is used – bad news for Facebook and Alphabet – fears over anti-trust risks to Amazon, growing out of fears related to President Trump’s instinctive distrust of tech, and, in the case of Tesla, a car crash involving one of its vehicles that may have been (note the use of the word may) in autonomous mode.
Shares in Tencent - often described as China’s Facebook - have also fallen sharply, over fears that its growth may be slowing.
Apple and Netflix shares have been caught up in the negative sentiment and so, despite the words of Morgan Stanley, has Microsoft, but to a lesser extent.
As I write, sentiment is not with techs. This can mean it’s a good time to buy, although I am inclined to wait a little longer, things may get a lot worse before they get better.
This week, Morgan Stanley's Keith Weiss wrote in a note: “Strong positioning for ramping public cloud adoption, large distribution channels and installed customer base, and improving margins support a path to $50 billion in EBIT and a $1 trillion market cap for MSFT.”
Maybe the conditions are right to go for the old timer, which is Microsoft.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.