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Investors in Microsoft Corporation Stock Shouldn’t Forget About LinkedIn

Will Ashworth

There’s no doubt all eyes were focused on the cloud when Microsoft Corporation (NASDAQ:MSFT) announced its Q2 2018 results at the end of January. By most people’s estimation, they were pretty darn good, yet Microsoft stock barely moved.

In the three weeks since, the MSFT stock price has lost about $3, tempting some experts to call it a buy including InvestorPlace contributor Vince Martin.

“MSFT can appreciate 10%+ a year, with a nearly 2% dividend adding returns as well,” wrote Martin Feb. 16. “And a 22-24 forward multiple to FY19 EPS, which should be in the $4 range, plus the company’s net cash should get MSFT stock over $100 this year.”

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Microsoft Azure and the rest of the company’s cloud-based products and services are leading the charge. In the second quarter, Azure’s revenues grew 98% year-over-year, while its commercial cloud revenue rose 53%, bringing the annual cloud revenue to $18.6 billion, putting it ahead of Amazon.com, Inc. (NASDAQ: AMZN). 

No wonder investors are excited about Microsoft stock. And they should be, but let’s not forget about LinkedIn. Here’s why.

Getting a Return on LinkedIn

Investors have gotten so caught up in the cloud that they’ve forgotten about Microsoft’s $26.5 billion acquisition of LinkedIn. That, in my opinion, is a mistake. LinkedIn will continue to make a significant contribution to Microsoft’s overall revenue as the company further integrates it with its Office 365 customers.

In February 2017, I highlighted the areas where I thought Microsoft needed to focus when it came to LinkedIn to make the acquisition a success.

“While LinkedIn is considered the top social media site for business networking, it has just 106 million monthly active users (MAU) out of 467 million members. Facebook, Inc. (NASDAQ:FB) has almost 18 times that, with its 1.86 billion MAU,” I wrote last February.

“Microsoft might have plans for LinkedIn that go beyond its user numbers but it’s got to keep pushing the MAU metric higher because Facebook’s not going to stop growing its user base, especially when it comes to helping people find and secure new jobs.”

Statistics suggest that LinkedIn’s MAUs have increased significantly over the past year, hitting 250 million as of the end of 2017.

I concluded by suggesting that if Microsoft could get LinkedIn to an annual operating margin of 5.9% by the end of 2021, Microsoft will have a decent chance of paying off the entire acquisition.

In the second quarter, Microsoft grew LinkedIn’s revenue by 18.2% to $1.3 billion. More importantly, excluding the amortization of acquired intangible LinkedIn assets, it had an operating profit of $144 million for an operating margin of 11.1%, well above its best year as an independent company.

Annualize that number, and LinkedIn will deliver close to $600 million in 2018 operating profits, and that doesn’t take into account the business it’s pushing to Office 365, a big reason for buying the networking platform in the first place.

Bottom Line on Microsoft Stock

My colleague at InvestorPlace sees about 10% upside for MSFT stock in 2018, hitting $100 by the end of this year.

I think that’s a tad conservative when you consider that LinkedIn continues to grow user engagement, the cloud continues to perform well, and Office 365 subscribers increased 17.3% to 29.2 million.

Unless it takes a step backward in the next quarter or two, I’d say $110 is more likely for MSFT stock, perhaps even $120.

In December 2016, I stated that Microsoft stock would hit $80 sometime in 2017; it hit $80 in September. I’m going to go out a limb and predict it will hit $110 by September.

Seven months and counting.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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