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Microsoft (MSFT) has become the largest publicly traded company in the US because of its best-in-class management team that has been able to stay ahead of the competitive curve for decades. Microsoft was the largest company by market cap at the turn of the millennium, and 20 years later, this enterprise has taken the helm once again.
This software giant has been a role model for tech start-ups around the world. Microsoft has controlled the computer OS market for decades and is now taking control of the cloud computing market. The effective transition from on-premise software to cloud-based systems has brought this legacy firm back to its place at the top.
Microsoft’s new subscription-based revenue drivers, whether it’s Microsoft Office or one of its many cloud services its offer, has allowed this enterprise to grow out its sales by reliable double-digit percentages YoY. Microsoft offers customers Infrastructure-as-a-Service (IaaS) through its platform, Azure, competing in this very lucrative but quickly saturating business with tech giants like Amazon (AMZN) and Google (GOOGL).
The $50 billion IaaS industry is proliferating, and more businesses see the benefit of outsourcing their tech infrastructure. Amazon’s AWS has controlled the space as an early mover on cloud computing, but Azure is slowly but surely taking market share. Azure is in an early stage of development compared to AWS, but it is being offered at a fraction of the price, growing at double the rate, and analysts are calling it best-in-class.
MSFT has a lot of momentum behind it right now, with over 70% price appreciation over the past 52-weeks and has had 10 consecutive quarterly reports that resulted in an upward price movement. Microsoft’s cloud investment is finally paying off, and investors have been pricing its long-term potential into the stock. They will continue to do so as this company proves its ability to maintain current growth levels.
Microsoft has $134 billion in cash on hand combined with massive growing free-cash-flows, which gives the company an enormous amount of financial flexibility for organic growth and acquisitions.
Microsoft illustrates the perfect model of how a firm executes profitable growth. The company is mature enough to drive strong shareholder returns through substantial stock buybacks and a sustainable 1.1% dividend that is estimated to grow 10% annually. Microsoft is innovative enough to continue expanding its topline by robust double-digit percentages and rapidly expand margins. This enterprise demonstrates all the best features of both a value and growth stock allowing investors to benefit from both aspects.
Some investors are worried that MSFT’s valuations multiples have driven up too high, with its forward P/E trading at its highest level in almost 2 decades, but I can’t entirely agree. Microsoft’s new growth drivers, combined with the current easy money policies that the Federal Reserve has implemented, I am confident that MSFT’s current P/E valuation is warranted and may have more room to run.
Microsoft may sound like an obvious investment choice, being the largest US company, but sometimes the most straightforward option is the right one. Microsoft is driving over 5% of the S&P 500 and will progressively drive more as it continues to outperform the broader market. Analysts are again raising EPS estimates on this tech powerhouse, propelling this stock into a Zacks Rank #1 (Strong Buy).
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