The days of triple digit growth are long behind Microsoft. The heady 1990s was a period of outperformance for Bill Gates’s firm, but remarkably two decades later, this software giant continues to thrive in spite of economic headwinds.
Microsoft remains a giant thanks to a virtually impenetrable moat, extraordinary recurring revenues, and a diverse mix of sales channels.
In Q2 the firm reported revenues of $51.9 billion, representing a growth rate of 12%. Earnings per share came in at $2.23, a 3% hike year over year.
Although the numbers don’t stand out as eye-popping figures, they are truly impressive given the company’s size and the headwinds faced from inflation and supply chain interruptions.
Near-term, Microsoft provides investors with the stability needed to navigate a tough climate. Analysts agree and have pegged fair value at $327.50 per share. We’re not quite so bullish. When we ran a discounted cash flow forecast analysis on MSFT, we arrived at an intrinsic value of $294.76 per share, suggesting upside of 20.7%.
Over the long-term, Microsoft has ample opportunities to realize its potential. Growth should remain steady with Cloud computing acting as a key driver; Azure grew by 40% in the Q2.
Like Microsoft, Amazon has tremendous upside potential. Analysts are bullish on the stock with a consensus target price of $173.18 per share baked in.
We’re somewhat less optimistic in our figures, and yet we still arrive at a worst-case discounted cash flow forecast of $147.62 per share. If we’re right, there’s at least 19.5% upside in Amazon right now. If analysts are right, there’s at least double that return potential on the horizon.
One reason for our more pessimistic outlook versus that of analysts is Amazon’s e-commerce business, which is tethered to the retail customer, who will increasingly suffer from inflationary pressures. We’ve already seen that flow through to Amazon’s reported numbers, which came in at $121.1 billion in revenue, a 7% rise and a $2 billion loss, a sharp reversal from the $7.8 billion net income gain a year prior.
While reduced consumer spending and rising costs are forecast to take a toll in the near-term, the company’s gem, AWS, is expected to deliver sustained, rapid growth for the foreseeable future. AWS continues to dominate its arch-rivals and that should result in a return to profitability for Amazon over the medium-term if not sooner.
JP Morgan Chase
Like Amazon, JP Morgan missed analysts’ estimates in Q2 but that shouldn’t rattle long-term investors, especially those who care about ongoing dividend income. Not only does JP Morgan pay an attractive 3.42% dividend, it also has the highest upside of any stock in this article based on our calculations.
We estimate that JP Morgan fair value sits at $146.13 per share, representing 24.8% upside. Combining a handsome dividend payment with potentially market-crushing returns over the next few years, JP Morgan makes for a very attractive purchase at these levels.
The metrics are looking relatively solid with loan balances up 7% year-over-year and credit card balances up 9%. Unlike some other financial institutions, JP Morgan has a history of stability, having successfully weathered the a century of challenges from the Great Depression to the Great Recession.
For investors who want to attach themselves to an institution that has a proven history of prospering in rising interest rate environments, war times, booms, and busts, JP Morgan Chase might be as good as any financial institution gets.