With a market value of just over $874 billion, Microsoft (NASDAQ:MSFT) is the largest U.S. company by market capitalization. Over the past year, Microsoft stock is up 15%, or nearly quadruple the gains of the Nasdaq-100 Index, of which Microsoft is a marquee member.
A 15% gain in 12 months for a company the size of MSFT does not go unnoticed and that performance can give investors pause about getting involved with Microsoft stock over the near-term.
While those concerns and concerns pertaining to valuation are legitimate, MSFT stock can credibly command higher multiples relative to similarly mature technology companies because it has the growth catalysts to back up those multiples.
“We see wide-moat Microsoft as an attractive investment opportunity throughout 2019, as there are very few companies the size of Microsoft that can offer 12% revenue growth and 15% earnings growth in each of the next several years,” said Morningstar in a recent note. “With shares hovering around $111, we see more than 15% upside to our $130 fair value estimate.”
Microsoft Stock: ‘To the Cloud’
A while back, Microsoft had a quirky advertising campaign where the catchphrase was “To The Cloud.” Some critics panned the commercials for being light on relevant cloud computing content and points, but Microsoft was onto something. Today, the company is a leader in cloud computing and Microsoft stock is benefiting.
Cloud revenue for Microsoft’s recently reported fiscal second quarter grew to $9 billion, equaling a run rate of $36 billion, up from $34 billion in the company’s fiscal first quarter.
“We estimate Azure is approximately a $7 billion business and it still grew by a staggering 76% year over year in the December quarter,” said Morningstar. “The battle for cloud supremacy has become a two-horse race between Azure and AWS (Amazon Web Services), and Azure is well-positioned given its installed base at enterprise customers with Server, Database, Dynamics, and Office. Enterprise clients are increasingly adopting a hybrid cloud environment, which plays into Microsoft’s strong position, as the company can offer customers their existing environment in either public cloud or on premise flavors.”
By some estimates, Azure sales could reach $26.4 billion through fiscal 2021 and some market observers believe the cloud could replace Windows as Microsoft’s primary area of emphasis. That justifies the premium MSFT stock commands over rivals, such as Apple (NASDAQ:AAPL), International Business Machines (NYSE:IBM) and Oracle (NYSE:ORCL).
“At 25.5x forward earnings, they trade at a significant premium to its rivals Oracle (14.4x), IBM (10.1x) and Apple (15.2x),” reports Forbes. “This premium is largely justified. Microsoft has stronger prospects and a more secure stream of future revenues.”
While MSFT’s biggest revenue drivers are mainly business-to-business products, but with Xbox, the company is a major player in the booming video game arena. While Xbox and related fare are unlikely to usurp Azure and Windows as Microsoft revenue drivers, video game exposure is a nice compliment to Microsoft stock’s growth prospects.
“The gaming side of this company, the ability to move it all on to subscription service and become a ubiquitous platform globally in gaming is a potential that not many people talk about yet the company continues to move in that direction,” said “Shark Tank” star Kevin O’Leary in a mid-2018 CNBC interview. “I think that’s why this stock will actually expand its P/E in the next year. It will start to trade as something different than a dino tech that it used to be.”
In what could be a modest catalyst for Microsoft stock, the company is expected to reveal plans for cross-platform partnerships, including making games available on Nintendo’s (OTCMKTS:NTDOY) Switch and making Xbox Game Pass available to users of Sony’s (NYSE:SNE) PlayStation 4.
Last year, Microsoft completed multiple acquisitions to bolster its video game studio. By revenue, Microsoft is estimated to be the fourth-largest video game company.
MSFT stock is a dividend stock and with the company’s low yield (1.65%) and massive cash position, there is room for the stock to be a dividend growth stock. At the end of last year, the company had $127.66 billion in cash and short-term investments on hand.
Microsoft already is a dividend growth story. Microsoft stock currently has a quarterly dividend of 46 cents a share. That is up from 42 cents a share for the three first quarters of last year and nearly triple the 16 cents a share per quarter the company paid in 2011.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
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