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Buy Microsoft (MSFT), Not FAANG Stocks for Stable Growth & Income

Benjamin Rains

Shares of Microsoft MSFT have climbed roughly 18% this year, which tops the S&P 500’s 14% jump but falls short of its industry’s 21% average expansion. Still, Microsoft stock has outpaced FAANG stocks over the last 12 months and the historic, dividend-paying software powerhouse has continued to expand and reinvent itself, growing in everything from cloud computing to artificial intelligence.

Overview & Growth

Microsoft has long been a leader in the software business, helping drive the modern personal computing age. The firm’s Windows software is as important as ever and its Office portfolio is arguably more robust. Plus, its tablet business has expanded at it takes on Apple’s AAPL iPads and others.

The Redmond, Washington-based company has also expanded through acquisitions such as LinkedIn. The business-focused social media company could become even more important as Facebook faces more backlash and government scrutiny. Last quarter, LinkedIn saw its revenue surge 29% on the back of record engagement levels.

The company’s expansion into the Internet of Things and cloud computing has also paid off. Microsoft, led by its Azure division, was the second-largest cloud firm in the industry last quarter behind only Amazon AMZN—which had a massive head start on all of its current competitors, including Google GOOGL and IBM IBM. Microsoft cloud boasts a laundry list of major Fortune 500 clients that include the likes of Walmart WMT and other giants, some of which don’t want to help the rapidly expanding e-commerce power in any way.

Meanwhile, Microsoft, along with Sony SNE and Nintendo NTDOY, control much of the gaming console market. But the industry could be racing toward a cloud-based streaming future and Microsoft is ready to challenge newcomers like Amazon, Google, and Apple. Furthermore, MSFT is poised to benefit from the eventual explosion of the autonomous vehicle market. Microsoft also recently unveiled its next-generation augmented-reality headsets known as HoloLens 2, which combine AI and mixed reality and are promoted as a way to bring companies into the future.

 

 

More Fundamentals

As we touched on at the top, MSFT stock has outpaced Facebook FB, Apple, Amazon, Netflix NFLX, and Google over the last 12 months. Microsoft rests inches above AMZN and NFLX but sits firmly on top of the others during this stretch. Thanks to its strength, Microsoft stock currently hovers right near its recently reached all-time high of $120.82 per share.

Investors should note that even though Microsoft has performed better than the Computer Software-Services Market average, MSFT stock has consistently traded at a discount to compared to the industry. Microsoft is currently trading at 24.6X forward 12-month Zacks Consensus EPS estimates, which comes in below its industry’s 26.9X average. MSFT has also traded has high as 26.9X over the last year, with a 12-month average of 24.5X.

Microsoft is also a dividend payer that has paid out a $0.46 per share dividend throughout its fiscal 2019. This marked a 9.5% increase from the prior year’s quarterly payout and an 18% jump on a two-year stack. The company’s yield rests at 1.54% at the moment. MSFT obviously hasn’t always paid a dividend, but it has for well over a decade. Its tech titan peers, Amazon and Google, don’t yet pay a dividend, neither do the other FAANG stocks, with the exception of Apple.

 

 

Outlook

Moving on, Microsoft’s Q3 fiscal 2019 revenue is projected to jump over 11.2% to reach $29.83 billion, based on our current Zacks Consensus Estimate. This would come in just below Q2’s 12% top-line expansion. More specifically, Microsoft’s quarterly Intelligent Cloud revenue is projected to jump approximately 17.5% from $7.896 billion to reach $9.282 billion, based on our NFM estimate.

MSFT’s current full-year revenues are projected to surge roughly 12.2% from $110.36 billion in fiscal 2018 to reach $123.87 billion. At the bottom end of the income statement, the firm’s adjusted Q3 earnings are projected to climb 5.3% to hit $1.00 a share. On top of that, the company’s current full-year earnings are projected to jump 13.7%, with 2020’s EPS figure expected to climb 12.5% above our 2019 estimate.

 

 

Bottom Line

Microsoft is currently a Zacks Ranks #3 (Hold) based somewhat on its mixed earnings estimate revision activity. Nonetheless, MSFT appears to be a strong stock for investors to consider adding to their portfolios as it provides a great mixture of steady growth and dividends, coupled with exposure to new industries with potential to boom down the road.

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