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Should You Buy This Tech Behemoth As The China/USA Tech Cold War Accelerates?

During his time in office, President Trump fought China on many fronts to combat trade imbalances among other things.

Because of this, while in office President Trump ordered Chinese company ByteDance to sell its U.S. operations for the popular Tik Tok app.

At one point Microsoft was going to buy the company… Then it was others.  Then it finally ended up with a group of companies led by Walmart and Oracle.

These fights over tech and privacy and data will only continue ramping up… With some saying this is the 21st century version of the Cold War.

Instead of potentially fighting with nuclear weapons though, this is a fight with Tech.

And news came out in February that many missed… But it shows Biden further taking steps away from former President Trumps policies toward China.

Back in February the Biden Administration announced that it was no longer going to force TikTok’s operations to sell to Walmart and Oracle.

Implications: Biden’s decision suggests that he may be taking steps to avoid “decoupling” the U.S. and Chinese economies.

“In his first 100 days the TikTok situation could potentially be a litmus test for Biden’s first move towards ending the US/China Cold Tech War if he possibly eliminates this executive order around TikTok US operations being sold/divested,” said Wedbush analyst Dan Ives in a research note Wednesday morning. He called the move “a bullish sign for the tech sector.”

The above is from Geekwire.com.

Microsoft originally planned to buy TikTok’s U.S. assets for as much as a rumored $30 billion before this… But the deal fell through during negotiations.

But this fight over tech is far from over…

There are still major concerns between the United States and China… Specifically when it comes to tech.

  • Privacy
  • Data collection
  • Is the Chinese government going to access and use this data in some way?
  • China stealing intellectual property from American tech companies.
  • Etc.

Because of that, today, I’m going to analyze one of TikTok’s former potential partners Microsoft to tell you whether you should buy it or not to protect your retirement portfolio from the building Tech Cold War.

Microsoft (MSFT) is one of the world’s largest and most dominant companies.

It develops, builds, and sells both software – Microsoft Office, Windows, etc. – and hardware – Xbox, Surface Tablets, etc. – for both personal and business use.

And it dominates these and various other industries like cloud computing, server technology, and much more.

Its so dominant that as of this writing it’s the 2nd largest company in the world by market cap.

During the pandemic, these business lines helped Microsoft not only survive… But thrive while most companies flailed.

It grew revenue, profits, and cash flows during the worst economic situation we’ve seen since the end of World War 2.

And this strength pushed the company’s shares 76.5% higher in the last year.

Today, I want to help you figure out whether you should buy it or not for your retirement portfolio.  Especially with the Tech Cold War heating up.

It’s based in Redmond Washington.  It has a $1.84 trillion market cap. And it pays you a 0.91% dividend. Which is reason #1 to consider buying its stock.

Microsoft’s 0.91% Dividend

Over the last decade Microsoft paid out a total of $22.53 per share in dividends.

At today’s share count of 7.626 million shares that’s equal to $171.81 billion paid out to shareholders in that time.

It also grew its dividend 251% from $0.61 per share in 2011 to $2.14 per share now.

These dividend payments will help you in normal times earn cash if you take the money out.  Or allow you to buy more shares over time if you reinvest the dividends.

These regular payments will help you earn more money for your retirement.  And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.

It can do this because it earns massive profits.  Which is reason #2 to consider buying Microsoft for your retirement portfolio.

Microsoft Earns Massive Profits

Over the last decade it earned an average operating income margin of 32.6% per year.

I look for anything above 10% so this is fantastic.

Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 31.8% per year on average.

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.

Microsoft far surpasses both thresholds which means it’s a world class business operation.

In fact, these margins are so spectacular it makes them one of the best companies on Earth… Which is why it’s the 2nd largest company in the world based on market cap.

Another thing these huge profits allow is lowish debt levels.

Microsoft Has Lowish Debt Levels?

As of this writing Microsoft has $125.41 billion in cash compared to $67.33 billion in debt.

As a percentage of its balance sheet total liabilities make up only 56.5%. 

Debt makes up only 3.7% of its market cap.

And its debt-to-equity ratio is an ultra-low 0.44.  For example, I look for anything below 1 on a consistent basis here.

And this all gives you an enormous margin of safety when you consider buying Microsoft to protect your retirement portfolio.

So far, MSFT looks like a great stock… But what about its valuation? Is it cheap enough to buy?

Microsoft IS NOT Cheap…

With the markets at or near all-time highs you might expect a great stock like Microsoft to be selling at an enormous valuation.

Unfortunately, it is.

As of this writing its P/E is 32.6.

Its P/CF is 25.1.

Its forward P/E is 28.7.

And its enterprise value to operating income – EV/EBIT is 25.8.

On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

These metrics combined show that MSFT is overvalued right now when considering all the metrics together.

And this means owning its stock does not give you a large margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning its stock going forward.

With MSFT being overvalued right now, its stock does not give you a large margin of safety.

Conclusion

If you’re looking for a solid, safe, dividend paying, stable, inflation fighting, and enormously profitable investment to buy to earn high and safe returns for your portfolio – Avoid Microsoft until its cheaper.

And instead consider investing in one of the stocks below to protect your retirement during these uncertain times.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

P.S. Breaking Poll – Is Biden Hard Enough On China Economically? Vote Here


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