Microsoft Stock Resilient Despite Recent Setbacks

Microsoft (MSFT -1.05%) has found itself amid a flurry of negative headlines as a recent IT outage impacted Windows systems worldwide. On Friday, Microsoft shares fell 0.2%, or 85 cents, to $439, following disruptions caused by a software update from cybersecurity firm CrowdStrike (CRWD -11.50%). The outage led to significant travel interruptions and affected operations at financial institutions such as Charles Schwab.

Value Investors Remain Steadfast

Despite this setback, Microsoft’s stock has surged nearly 32% over the past year. This resilience is partly due to the strong support from value-fund managers who continue to favor the stock. According to Morningstar data, about 44% of large-cap value managers hold Microsoft shares. While some have only modest stakes, for many, Microsoft represents a major investment. In contrast, only about 25% of large value funds own Meta Platforms (META 0.36%), and just 10% own Amazon.com (AMZN -0.68%).

A Surprising Presence in Value Funds

Microsoft’s substantial presence in value funds might seem surprising given its price-to-earnings ratio of 38, compared to the S&P 500’s (SPX -0.83%) 26. Morningstar analyst Jack Shannon explains that many value managers seek undervalued stocks to hold for the long term. Their goal is to wait until the intrinsic value of these stocks is recognized. Just a decade ago, Microsoft had a P/E ratio of 14, and in 2012, its price was only 10 times earnings.

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Strong Business Fundamentals

Microsoft’s business model is attractive to value investors due to its wide adoption of Office productivity products and its dominant position in the cloud-computing market with Azure. Despite recent challenges, these factors provide Microsoft with significant protection against competition. Moreover, a large portion of Microsoft’s revenue is recurring, coming from subscription-based services that generate predictable cash flows. Angelo Zino, stock analyst at CFRA, highlights that this predictability is highly valued by investors.

AI Partnership Enhances Growth Prospects

Microsoft’s prominent partnership with OpenAI further bolsters its growth prospects. Zino estimates that AI contributes approximately six to seven percentage points to Azure’s 30% annual growth rate. This contribution is expected to increase over time. This high-growth area presents both risks and rewards, but it underscores Microsoft’s potential for continued success.

Unwavering Support from Fund Managers

The recent IT issues have not deterred value managers from retaining their Microsoft investments. Jonathan Boyar, co-manager of the Boyar Value Fund, noted in an interview that the fund’s significant investment in Microsoft remains steadfast. “It’s a high-quality, best-in-class business,” Boyar said. “We believe it will continue to lead for years to come.”

McCoy Penninger, co-manager of the Union Street Partners Value Fund, echoed this sentiment. Microsoft, the fund’s largest holding, has been a core part of its portfolio since 2011. Penninger praised CEO Satya Nadella’s strategic decisions and highlighted that operating a business without Microsoft products is almost inconceivable.

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