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Microsoft Corporation Goes All-In on the Internet of Things

Tom Taulli

When it comes to understanding the secular trends in technology, Microsoft Corporation (NASDAQ:MSFT) CEO Satya Nadella has been spot on. When he took the helm of the company in 2014, he took swift action to focus on the cloud. And yes, the results have been standout. Note that during the past three years, the compound annual growth rate for Microsoft stock has been a sizzling 32.63%.

Nadella even wrote a book about his vision for his company and the tech industry, called Hit Refresh: The Quest to Rediscover Microsoft’s Soul and Imagine a Better Future for Everyone. In it, he explores many types of emerging technologies like artificial intelligence (AI), mixed reality and quantum computing — with great insights on the implications and opportunities.

So yes, in the years ahead, there should be continued growth for Microsoft stock. It certainly helps that the company has a set of strong assets like a trusted global brand, a sophisticated IT infrastructure, many applications that generate substantial cash flows and thousands of talented engineers. MSFT also has a massive ecosystem, which provides significant barriers to entry.

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Here’s how Nadella put it in his book: “Hundreds of thousands of companies worldwide build and sell solutions that support our products and services. In addition, millions of customers in every sector have built their businesses and organizations using Microsoft technologies.”

IoT and Microsoft Stock

Now one of Microsoft’s latest initiatives is for the Internet of Things or IoT.  The company plans to shell out a hefty $5 billion on this category during the next four years.

For the most part, IoT is about using sensors, chips and cloud technologies to connect devices, such as autos, refrigerators, wearables, industrial systems and so on. By doing this, there is likely to be better usage and efficiency, as well as safer applications.

As for MSFT’s plans, the details are a bit sketchy — hey, why give away information to rivals, right? But according to Julia White, the corporate vice president of Microsoft Azure, the goal is to use IoT to “transform” businesses by providing powerful, yet easy-to-use technologies.

No doubt, the opportunity is enormous. According to research from A.T. Kearney, IoT systems are expected to result in $1.9 trillion in improved productivity and $177 billion in lower costs by 2020.

MSFT will also be able to leverage its cloud platform and mission-critical applications. What’s more, there will be synergy with the investments in AI, deep learning and big data.

Something else to note: MSFT already has an IoT platform. Already companies like Chevron Corporation (NYSE:CVX), United Technologies Corporation (NYSE:UTX), Johnson Controls International PLC (NYSE:JCI) and Steelcase Inc. (NYSE:SCS) are innovating on it. For example, Johnson Controls has used the Microsoft IoT platform to build its smart thermostats.

So Is Microsoft Stock a Buy?

As seen with the latest earnings report, Microsoft continues to gain momentum, especially with its cloud business. Consider that the Azure business saw its revenues spike by 90%. In fact, Microsoft has become the No. 2 player in the cloud industry, behind Amazon.com, Inc. (NASDAQ:AMZN)

In the meantime, MSFT continues to crank out tremendous cash flows. During the last six months, they came to over $20 billion — the company also has $142.8 billion in offshore accounts. As a result, the company can continue to invest heavily in emerging technologies and increase buybacks and the dividends.

Granted, the valuation on Microsoft stock is not necessarily cheap, with the forward price-to-earnings multiple at 23X. But then again, in light of the company’s financial strength and growth profile, the premium is certainly reasonable.

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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