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With Fading Headwinds and Cloud Growth, Microsoft Stock Looks Solid

Tom Taulli

Microsoft (NASDAQ:MSFT) hasn’t had the same few months that the rest of the market has had, but it’s not a huge problem for Microsoft stock. After all, it seems as if the markets have had a double personality.

Late last year, the selling was harsh, as the major indexes sunk to bear market levels, but things turned on a dime at the start of the new year. A big help has been the Federal Reserve, which has hinted it will hold off on interest rate increases. There has also been optimism with the U.S.-China trade situation.

So in this year’s bull more, some of the biggest winners have been the mega tech operators like Facebook (NASDAQ:FB), Netflix (NASDAQ:NFLX) and even IBM (NYSE:IBM).

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But for one reason or another Microsoft has been left out of the party. The return for the year is a mere 1%.

Granted, MSFT stock is not too far off its 52-week high. What’s more, the shares have have logged market-beating returns for the past five years. So yes, it’s reasonable for there to be a breather.

Something else: Microsoft stock has been weighed down on the news of the latest earnings report. While profits came in at $8.42 billion or $1.10 per share (on an adjusted basis), which beat expectations by a penny, the top-line was another matter. Revenues grew by 12% to $32.47 billion yet the Street was looking for $32.51 billion.

What happened? Well, the Windows business suffered from a chip shortage due to Intel’s (NASDAQ:INTC) own problems. This has certainly come at an inopportune time since companies have been revving up spending on PCs.

But for the most part, the supply issue is likely to be temporary. Keep in mind that INTC is working hard to get things back on track.

Microsoft Stock and Growth

Despite some headwinds, there should not be much to worry about Microsoft.  The fact is that the rest of the the business remains in the growth mode.

For example, LinkedIn saw its revenues jump by 29% during the quarter and the user base hit 610 million. This platform has also been a nice driver for other parts of MSFT, such as business apps.

Note that the Office 365 online system grew by 34% and Dynamics (which provides for CRM and ERP services) was up an impressive 51%.

Of course, the cloud remains another nice driver and has been the main catalyst for Microsoft stock over the years. In the quarter, the commercial cloud revenues shot up by 48% to $9 billion and Azure posted sizzling growth of 76%.

More important, there is much more room on the upside in the market. According to research firm Gartner, spending on cloud technologies will go from $175.8 billion in 2018 to $278.3 billion by 2021.

Bottom Line 0n Microsoft Stock

Satya Nadella has definitely been the right leader for MSFT. Since coming on board five years ago, he has refocused the company on its core strengths, such as business computing, developer tools and infrastructure services. He has also been bold with his acquisitions.

Just look at his recent deal for Github. While it came at a hefty price tag of $7.5 billion, the business should have deep synergies with MSFT. Github is powerful ecosystem for developers, with more than 31 million accounts and over 100 million code repositories. More than half of the Fortune 50 do their development activities on GitHub Enterprise.

As for Microsoft stock, it is not cheap. Note that the forward price-to-earnings ratio is about 20X. But then again, a premium is deserved given the company’s diverse assets and long-term growth prospects. In other words, Microsoft remains a good choice for those who want to get exposure to major tech trends.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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