Shares of tech giant Microsoft have declined this year amid a broader rout in the sector, but analyst Richard Kramer says the stock is still a buy, along with some other Big Tech favorites. Speaking to CNBC Pro Talks Wednesday, Kramer, founder and senior analyst at boutique equity research firm Arete Research, highlighted that despite their share price declines, the likes of Microsoft, Apple and Alphabet have outperformed the market this year. The tech heavy Nasdaq is down about 17% this year. In contrast, Microsoft is down about 15% over the same period, after rallying almost 5% higher on Mar. 9. Apple is down around 12% this year, while Alphabet is around 9% lower. Arete Research has buy ratings on all three stocks. Cash flow is king Kramer believes the stocks' relative outperformance is down to a "simple reason": the market is retreating into companies with relatively visible cash flows. "These three companies had $800 billion of sales, $267 billion in operating profit and $227 billion of cash flow in 2021. And those two magic words — cash flow — is what the market will be looking at to decide which are the names that you want to hang on to because that underpins the valuations," Kramer said. He described Microsoft as a "long duration asset with a lot of stability." Microsoft's proposed acquisition of gaming giant Activision Blizzard for $68.7 billion — which has since fallen through — amounted to just one year of cash flow for Microsoft, he noted. "Wait another year, and they will have another $70 billion to put back into buying back their own stock or think about other acquisitions," Kramer said. Moreover, Microsoft has managed to find new areas to expand into, despite the anti-trust scrutiny it faces, Kramer added. He noted that while it would be difficult for Microsoft to acquire in the IT software, security or services space, it could look to adjacent areas such as gaming or the metaverse. The company completed the acquisition of Massachusetts-based cloud and artificial intelligence software provider Nuance Communications in a $19.7 billion deal last week, paving the way for its potential expansion into the fast-growing metaverse space. "I wouldn't be surprised over the very long term to see Google and Microsoft come together in one common Metaverse play," Kramer said. Netflix, Disney Kramer also likes Microsoft for its "staying power," which makes the stock worth acquiring at its current price, he added, noting that companies such as Netflix and Disney enjoy similar characteristics. Kramer noted that the two streaming giants have large libraries of content that are likely to retain their value over time. The companies also have the potential to grow their subscriber bases over the long term, he added. "No one imagines that Netflix won't be around in five years, unlike many of those companies that have fallen 75% or more where there is a question mark about the staying power of those sorts of names," Kramer said. Labor market issues He cautioned that investors should not forget about several issues that are afflicting the tech sector, even as they remain focused on stock market volatility wrought by the Russia-Ukraine conflict. One such issue that Kramer highlighted is talent retention in a "very hot" labor market, against the backdrop of increased job mobility and a steep decline in the value of employees' stock options. Read more https://www.cnbc.com/2022/03/10/russia-ukraine-wall-street-analyst-names-top-tech-stocks.html "A lot of people working in these companies are now looking at the four-year bonus that they were going to get from their restricted stock units. [These stock options] are underwater and the idea that the stocks are going to rise 50% or 100% and — in the case of Spotify — to go, not just back to the IPO price, but way beyond it where most of the options would be struck, seems fanciful," Kramer said. This is where the likes of Microsoft, as well as Apple and Alphabet are ahead of their peers. "I think what you're seeing with Alphabet, Microsoft and specifically with Apple is that these are very well managed, highly rational companies that have anticipated some of these issues… So again, they will be better positioned than some of the smaller companies that haven't anticipated that problem," Kramer added.
Microsoft Corporation headquarters at Issy-les-Moulineaux, near Paris, France, April 18, 2016.
Charles Platiau | Reuters
Shares of tech giant Microsoft have declined this year amid a broader rout in the sector, but analyst Richard Kramer says the stock is still a buy, along with some other Big Tech favorites.