Adding Microsoft to my Jubak Picks portfolio–hoping for a July “miss” like that in April

As I wrote in Part 3 of my Special Report “Investing in a Late Cycle Market,” (available to subscribers to my paid JubakAM.com site), I’m adding Microsoft to my Jubak Picks portfolio.

The April third quarter earnings “miss” sets Microsoft up for a huge fourth quarter when the company reports on July 19. Plus whenever this market does turn optimistic and vote for risk-on with its cash, Microsoft is one of the big tech stocks that leads the move to the upside. The shares, which closed today at $101.42, have been stuck around $101 for the last week or so. That’s not a long time to put in a base but it does give this tech sector leader something to build off of.  I’d put a target price of $117 on these shares.

The April “miss”–and you should gather from the quotation marks that I’ve got my tongue firmly in check–came when the company reported growth of its Azure cloud software of just 93% year over year. That was below the 95% to 96% that Wall Street had projected.

Microsoft made up for that disappointment by turning in a 10 cents a share overall beat on earnings per share of 95 cents versus the consensus at 85 cents. And then raising guidance for the July fourth quarter report. The company guided Wall Street to expect higher revenue growth in its cloud business and higher gross margins.

The consensus Wall Street view is that this story has years to run with higher sales leading to efficiencies of scale leading to higher margins in the cloud business. Credit Suisse, for example, forecasts a 9.2% annual compound growth rate for revenue from fiscal 2020 to fiscal 2027 with operating margins peaking at 40.8%

Obviously, if I’m looking for some kind of credit crunch Minsky Moment crisis in the credit markets sometime in the next two to three years, I’m not expecting to see that growth rate continue until 2027. But I think Microsoft is a good place to be in the short-term game of musical chairs as we wait to see if/when the music stops.