Even the stock market’s most prominent names are suffering in 2022’s unhospitable environment. Take Microsoft (MSFT) for example, whose shares show a year-to-date uncharacteristic 14% decline.
That said, to be able to withstand the shaky macro climate, Morgan Stanley’s Keith Weiss thinks few are as well-positioned as Microsoft to do so.
“Microsoft continues to represent a rare combination of strong secular positioning and reasonable profitability-based valuation within the software space,” explained the 5-star analyst. “Leadership across key growth categories and CIO's indications of stable Enterprise IT spending into CY22 should help offset impacts of a volatile macro environment.”
Weiss notes that even in today’s uncertain surroundings, the software spending environment as a whole “remains strong,” and following on from the banking firm’s recent CIO survey, the analyst’s takeaway is that Microsoft still boasts “strong positioning across key growth and defensible spending categories.”
Yes, there are headwinds. Weiss counts global macro uncertainties, a modestly higher FX impact than provided with the guidance and Windows OEM “growth normalization” as ones impacting performance, yet also stresses that the “combined impact should be limited.”
Not to mention, the company has one significant tailwind blowing at its back. As workloads continue the migration to the cloud, these headwinds should be “offset by IT budget share gains.”
And although the bears think the 40%+ Azure growth is “unsustainable,” and are concerned growth will swiftly “decelerate” year-over-year into the 30% range, heading into 3QFY22 earnings, Weiss thinks the growth momentum remains “strong,” despite not anticipating further acceleration.
For the quarter, the analyst expects a slight deceleration to cc revenue growth, calling for a 45% uptick, although the channel checks indicate “continued cloud strength,” and as such, Weiss thinks there could be “some upside.”
Summing up, Weiss continues to see an “attractive path going forward, supported by CIOs’ view that Microsoft should gain the most IT wallet shares in the next 12 months, as well as, over the next three years as their companies transition to the Cloud.”
All in all, Weiss rates MSFT shares an Overweight (i.e. Buy) and backs it up with a $372 price target. If everything goes as planned, MSFT will soar 29% over the next 12 months. (To watch Weiss’s track record, click here)
Overall, Microsoft is that rare beast, with plenty of analyst coverage where all are in agreement; all 27 recent reviews are positive, naturally culminating in a Strong Buy consensus rating. At $374.88, the average price target sits just above Weiss’s and is projected to generate returns of 33% over the coming months. (See Microsoft stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
Shares of streaming entertainment kingpin Netflix (NFLX) have been plunging considerably lower of late, now down around 50% from their peak levels at ~$700 per share. With shares sagging around the $350 per-share mark, questions linger as to whether the former entertainment behemoth is worth a second look on the dip.
Though Netflix is still a leader that'll be tough to top in streaming, the competitive forces have grown so rapidly. With the pandemic tailwind now gone, Netflix may face its toughest competitive fight since its days clashing with Blockbuster and its mail-in DVDs.
Netflix rose out on top at that time as a pioneer in the Streaming Video-on-Demand (SVoD) space. As people become spread across a wide range of video subscription services, though, the staying power of Netflix will be propelled to the forefront.
Indeed, the average consumer likely has video subscriptions that go far beyond Netflix. Arguably, the SVoD space is becoming less convenient, with so many options out there. Further, big tech titans have pretty much thrown in their video services alongside a wide range of other services, most notably music and photo storage. For now, I am neutral on the stock.
Netflix's Price Increases Could Weigh on GrowthAlthough Netflix has demonstrated considerable stickiness and pricing power up until now, it remains to be seen what happens to the entertainment behemoth once a recession happens and consumers are forced to tighten.
Video streaming services are quite discretionary in nature. With Netflix hiking prices amid rampant inflation, it's unclear how consumers will react this time around, especially given the price of necessities, rent, and food has been off-the-charts.
Though we're not in a recession yet, consumers certainly feel the pinch. The inverted yield curve, which could point to a recession in 2023 or 2024, also does not bode well for discretionary firms.
If anything, Netflix's recent price hikes could work against it, given rivals will be fighting for a share of your average consumer's streaming budget, which could fall if we were to head into a Fed-induced economic downturn.
Indeed, questions linger as to whether Netflix's last quarter of slowed subscriber growth is just the start of a sustained trend lower. Though Netflix has a ton of great content, I think the company would have been better off absorbing the blow of inflation. The last thing investors want to see is a further deterioration in subscriber growth in the face of great economic uncertainty.
Netflix's Rivals are Getting StrongerTo offset slowing growth trends, Netflix needs to improve the value proposition for its users, as its big-tech bundling peers like Apple (AAPL) have been. Arguably, the Apple One bundle is hard to stack up against, with gaming, video, cloud storage, fitness, and news services at a reduced price.
Apple's streaming service, Apple TV+, may come up short versus the likes of a behemoth like Netflix. Still, Apple TV+ has come a long way since its days as a freebie that many Apple users passed up on. Apple's Oscar-award-winning CODA itself is gaining considerable attention, as too is sci-fi thriller Severance, a high-rated series that looks to "rhyme" with that of Netflix's Black Mirror.
Indeed, the Ben Stiller-directed series Severance and other intriguing additions (think Friday Night Baseball) to the Apple TV+ platform are starting to tilt the odds in favor of the platform over the likes of a Netflix, especially for some of the more price-conscious consumers out there who may be reluctant to accept the fact that prices are headed higher.
Netflix Needs to Go Beyond Video to Keep its Growth StrongWhat can Netflix do to improve the value of its own service? Obviously, a higher quantity and quality of video content will be needed to keep growth alive in a more competitive landscape.
However, the firm may need to go beyond just video. It's not a mystery that Netflix has video-game ambitions, but it's way behind in the game (forgive the pun, please), with only a few mobile offerings aimed at casual gamers.
I'd argue that Netflix should be looking to take a page out of Microsoft's (MSFT) playbook by making a big acquisition to bolster its footing in gaming. Otherwise, it could be hard for consumers to stand by as rivals drive down the price of video services.
It's not just gaming where Netflix can thrive; live sports is another arena (again, forgive the pun) in which the firm can better compete against the likes of an Apple TV+ or even a sports-focused service like DAZN.
With Apple in the running to win the rights to stream NFL Sunday Ticket, it seems as though Netflix may need to hustle to differentiate itself in the discretionary entertainment scene, which is growing to encompass more than just movies and series.
Wall Street's TakeTurning to Wall Street, NFLX stock comes in as a Moderate Buy. Out of 35analyst ratings, there are 18 Buy recommendations, 15 Hold recommendations, and two Sell recommendations.
The average Netflix price forecast is $508.57, implying upside potential of 45.5%. Analyst price targets range from a low of $342.00 per share to a high of $700.00 per share.
The Bottom Line on Netflix StockNetflix is down, but it's not out. Still, with an increased risk of a recession, recent price hikes and a crackdown on account-sharing may do the firm more harm than good amid its growth slowdown.
As the company explores new growth verticals (sports or gaming), the stock can have the means to bounce higher again. Until then, the road could prove rather bumpy for the former market darling facing competitive pressure from all sides.
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Soaring inflation in the United States, rising commodity prices, and Russia’s war on Ukraine have all led investors concerns about the upcoming Q1 earnings for all sectors. On Tuesday, the U.S. Labour Department’s numbers indicated that the consumer price index (CPI) rose 8.5% for the year ending March, the highest rise since the period ending in December 1981.
Moreover, inflation rose to 1.2% from February to March after an increase of 0.8% in February.
The Fed has already indicated that it plans to tighten its balance sheet by around $95 billion every month, and has already implemented the first interest rate hike. Chairman Jerome Powell has also signaled six more interest rate hikes expected this year and three more hikes next year.
Tightening the balance sheet refers to the Fed selling off its assets in an attempt to control inflation and a hawkish monetary policy stance.
In this scenario, the tech-heavy Nasdaq (NDX) index has seen a widespread sell-off of technology stocks resulting in the index declining 15.5% year-to-date.
However, Wedbush analyst Daniel Ives is not worried. The analyst believes that “fears around a fundamental tech slowdown are way overdone relative to our recent tech checks in the field.” Ives thinks that news of the rate hike is already priced in tech stocks, and it is now time to “aggressively own tech names.”
Using the TipRanks database, we looked at Ives’ picks which the rest of Wall Street is also bullish about. Let us take a look at these three top stocks.
Apple (NASDAQ: AAPL)Shares of Apple have fared relatively well versus its peers amid this tech sector selloff as the stock has dropped only 7.8% year-to-date. Moreover, many analysts are bullish about the stock and believe it will do well despite lingering supply constraints.
In a bid to address some of these constraints, the iPhone maker recently shifted its manufacturing of the iPhone 13 to India, in a move to diversify the production of the flagship model outside China.
For Citigroup analyst Jim Suva, the geopolitical risks aside, he continues to see "several positive drivers" for Apple. According to the analyst, demand for Apple’s products continues to be strong as people move away from cheaper Android phones toward mid-end and premium-priced products.
Suva brushed aside news of production cuts at AAPL as “nothing unusual at this point in the product cycle given Apple tends to overshoot on build estimates to ensure sufficient supply.” The analyst is of the opinion that AAPL’s current valuation does not reflect new product launches including a virtual or augmented reality (VR or AR) headset device and the Apple Car possibly in 2025.
The analyst has a Buy rating and a price target of $200 on the stock, implying an upside potential of 19.3% at early morning trading levels on Wednesday.
Even analyst Ives views AAPL as “both a Rock of Gibraltar defensive tech name as well as the best 5G tech play in the market with a massive product cycle that is gaining more steam.” Similar to Suva, Ives also has a Buy rating and a price target of $200 on the stock.
Other analysts on the Street are also upbeat about AAPL with a Strong Buy consensus rating based on 23 Buys and five Holds. The average AAPL stock forecast is $193.36, implying an upside potential of 15.1% from early morning trading levels on Wednesday.
Adobe (NASDAQ: ADBE)Shares of Adobe have been swept up in the tech sector selloff and have tanked 24.4% year-to-date even as the software company delivered upbeat Q1 FY22 results. Adobe posted record total revenues of $4.26 billion, up 17% year-over-year, beating analysts’ expectations of $4.24 billion.
Adjusted earnings came in at $3.37 per share in Q1, surpassing the consensus estimate of $3.34. However, it was the company’s Q2 outlook that disappointed analysts. ADBE has projected net revenues to be $4.34 billion, while analysts were expecting revenues of $4.41 billion. Furthermore, adjusted earnings are projected to be $3.30 per share, compared to the Street’s estimate of $3.35 per share.
Deutsche Bank analyst Brad Zelnick is convinced by the enormous creative total addressable market (TAM) for ADBE “which has been ever expanding beyond expectations, its many levers for durable growth, as well as the even greater opportunity in Digital Experience.”
The analyst is convinced that the Digital Experience (DX) market is “ripe for consolidation – especially in a post-pandemic, cookieless world – with Adobe one of only two logical winners.”
As a result, Zelnick reiterated a Buy rating on the stock but lowered the price target from $660 to $575, implying 34.7% upside potential at early morning trading levels on Wednesday.
The rest of the analysts on the Street echo Zelnick, and are also bullish on the stock with a Strong Buy consensus rating based on 21 Buys and five Holds. The average ADBE stock forecast is $567.64, implying an upside potential of 33.1% from current levels.
Microsoft (NASDAQ: MSFT)Shares of Microsoft have slumped 15.7% year-to-date as the macroeconomic concerns have weighed on investors’ minds. The question then begs, will macroeconomic headwinds drag down this software giant?
Morgan Stanley analyst Keith Weiss does not think so. His channel checks have indicated MSFT’s “strong positioning across key growth and defensible spending categories.” The analyst pointed out that besides macroeconomic uncertainties, other headwinds for the stock include a slightly higher impact of foreign exchange fluctuations and normalization of growth when it comes to MSFT’s Server Products.
However, Weiss thinks that these headwinds could very well be offset by MSFT’s cloud services (Azure) as the company stands to benefit as more enterprises transform to the cloud. MSFT is the analyst’s preferred name and he has a Buy rating and a price target of $372, implying an upside potential of 31.8% from early morning trading levels on Wednesday.
Other analysts on the Street echo Weiss and are bullish with a Strong Buy consensus rating based on 27 unanimous Buys. The average MSFT stock forecast is $374.88, implying an upside potential of 32.4% from early morning trading levels on Wednesday.
Bottom LineIt is obvious from analyst Ives’ list that other Wall Street analysts also share his view and overall, the large-cap tech stocks seem to be poised to sail through the macroeconomic headwinds.
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