Nothing looks safe in a fearful market. Investors shun stocks indiscriminately, ignoring fundamentals and their reasons for buying a stock in the first place.
This happens every time the market goes through a correction. And the recent selloff is no different. Investors are deserting some beloved technology stocks that are backed by great businesses.
The tech-heavy Nasdaq Composite is down more than 8% in the past month, taking down some of the best-run technology companies. But if you’re an opportunistic investor willing to hold stocks through thick and thin, this selloff may offer some good buying opportunities.
Microsoft (NASDAQ:MSFT) is our top technology stock to consider adding to your portfolio at prices much lower than a month ago.
A Company Firing On All Cylinders
It’s hard to put together a bear call on Microsoft, no matter how hard its stock is hammered in this correction. The company is firing on all cylinders following a successful execution of its turnaround strategy that focused on cloud computing and solidified the tech giant’s legacy businesses.
Microsoft remains the leader in the desktop and laptop operating system market, with a commanding 88% market share. Office, which has been transformed into a subscription service for companies, continues to be a powerful driver of earnings. In the fourth quarter, revenue from cloud-computing platform Azure rose 89%, while sales of web-based Office 365 software to businesses climbed 38%.
Microsoft stock is down more than 8% from its Oct. 3 close of $115.61. We believe Microsoft is a great buy-on-the-dip opportunity for investors looking to get into a solid growth stock.
The stock may climb to $123.55 in the next 12 months, according to a survey of analysts, a potential upside of 16% from the current level as the company continues to benefit from higher demand for cloud computing, artificial intelligence and corporate software.
The cloud computing market, for example, is expected to grow from $285 billion last year to $411 billion by 2020. That segment alone is big enough to drive the company’s revenue growth for the next three to four years, according to Microsoft executives.
Another reason that makes Microsoft an attractive investment to hold during these times of distress is its rock-solid dividend.
The companies that pay regular dividends are in a much better position to withstand the selling pressure than those that don’t. Dividend-paying stocks are less volatile in a bear market as they provide recurring income.
Microsoft has an excellent track record in this. Since 2004, when it first began paying a dividend, the company’s payout has swelled by 425%. Dividend growth has been supported by a low payout ratio and strong underlying businesses. With an annual dividend yield of 1.7%, Microsoft pays a quarterly dividend of $0.42 per share.
Bottom Line
Even after the recent pullback, Microsoft stock is one of the top performers among the top tech names, surging 23% in 2018. We believe the company’s earnings momentum will continue as it expands its market share in the crucial cloud computing space and maintains its leading position in legacy software products. These growth drivers will help the company to achieve sustained double-digit growth in revenue, earnings per share and free cash flow, making it a reliable tech stock to own over the long run.