Microsoft has wound up in a place no company wants to be: The subject of negative front-page headlines around the world. But the legion of value-fund managers who love the stock are likely to shrug off the news, so investors should consider doing the same.
Shares of Microsoft were down 0.74% to $437.11 on Friday, following an overnight IT outage that snarled Windows computer systems around the world. The problems, which appear to have been tied to a software update from the cybersecurity firm CrowdStrike, stranded thousands of travelers and disrupted operations at financial companies.
Despite Friday's bad news, Microsoft is still up nearly 32% in the past year. While tech-stock investors aren't necessarily known for tuning out hype, Microsoft has a surprising cohort of die-hard fans that are.
Microsoft shares are owned by about 44% of large-cap value managers, according to Morningstar data. While some own just token stakes, Microsoft is among the largest holdings at others. Only about 25% of large value funds own Meta Platforms, and 10% own Amazon.com.
Microsoft's presence in value funds might seem hard to swallow given that its price-to-earnings ratio is 38, compared with 26 for the S&P 500. But as Morningstar analyst Jack Shannon says, many value managers aim to buy underpriced stocks and hold them for years, until the market recognizes their worth. As recently as a decade ago, in 2014, Microsoft was trading at just 14. In 2012, it was priced at 10 times earnings.
Microsoft's business also has some features that value-style investors might like. Businesses across the world rely on Microsoft's suite of Office productivity products. While Friday's news shows the downsides of that ubiquity, it also gives Microsoft impressive protection against competition, making it difficult for even frustrated users to contemplate switching.
A large share of Microsoft's revenue -- from both its Office products and its highly profitable Azure cloud-computing unit -- also tends to be recurring. Clients essentially sign up for subscriptions that throw off easy-to-forecast tranches of cash, notes Angelo Zino, stock analyst at CFRA. "The visibility is something investors really like," he says.
All that is outside of Microsoft's high-profile partnership with OpenAI, which is a much faster-growing business proposition, with higher risks and potential rewards. Zino estimates AI contributes about six to seven percentage points to the 30% annual growth rate at the Azure cloud-computing business, although that should increase over time.
No wonder value managers have been unlikely to part with Microsoft. And Friday's kerfuffle isn't likely to change their minds.
"This just shows how dependent everyone is on Microsoft," said Jonathan Boyar, co-manager of the Boyar Value fund, in an interview Friday morning. The fund has more than 10% of its assets invested in Microsoft, its second-largest holding.
Boyar says the fund bought Microsoft in 2006, when it was trading at just 12 times earnings. The fund hasn't sold, in part because that would trigger a large capital gain for clients, but also because Microsoft remains a very attractive stock. "It's a high quality, best-in-breed business," he said. "We think it will dominate for years to come."
McCoy Penninger, co-manager of Union Street Partners Value Fund tells a similar story. Microsoft is the fund's largest holding, also at more than 10% of the portfolio. It's a stock the fund has owned since its 2011 inception.
"Since [CEO] Satya [Nadella] has taken over, Microsoft has made the right bets and positioned the company well to win in emerging tech markets like Cloud and AI," he wrote in an email Friday. "The prospect of operating a business without using a Microsoft product is nearly unthinkable."
Comments