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Microsoft Stock Is Still Compelling After Recent Rally

Chris Lau

When the market capitalization of Microsoft Corporation (NASDAQ: MSFT) topped the $1 trillion mark, investors barely noticed. And why should they? MSFT stock is up about 33.5% in 2019, beating Alphabet’s (NASDAQ: GOOGL) 5% 2019 return but just ahead of Apple’s (NASDAQ: AAPL) 28% jump. Still, Microsoft has strong revenue momentum as it grows its cloud software and enterprise business and prepares to implement a video- console refresh in 2020.

MSFT’s Notable Achievements

Microsoft stock still maintains a cloud-growth engine

Source: Shutterstock

Microsoft’s LinkedIn unit grew its job listings from 300,000 five years ago to 20 million  in May 2019. The strong activity justifies the over $26 billion that MSFT paid for the website in 2017. But the professional social network’s value to the owners of MSFT stock goes beyond numbers. As a data asset, it gives Microsoft valuable connections and a venue for advertising its own business software. Additionally, MSFT can use its own relationships with companies to sell LinkedIn’s products, boosting Microsoft’s sales and MSFT stock in the process. And as MSFT adds AI to LinkedIn’s sales tools, demand for them will accelerate further.

In the video-game console space, Microsoft announced a refresh to its Xbox. Known as “Project Scarlett,” the new console will have 8K video, support up to 120 frames per second, have a faster NAND-based storage drive, and will use AMD’s (NASDAQ: AMD) chips. Instead of selling the new consoles at today’s price range of $399 – $499, Microsoft may lower the price. Since the  games played on the console will be streamed, it requires less storage and memory. As a result, the consoles will be less costly to build. The console’s lower prices may drive unit sales higher, allowing Microsoft to enjoy  higher profits from game sales and providing another positive catalyst for MSFT stock.

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Continued Growth Ahead for Microsoft

The deep integration between Azure, MSFT’s cloud business; Microsoft 365,  its Office and Windows enterprise subscription business; and Dynamics, its other business software apps, brings many advantages. Customers may now perform deep learning through Power BI, which is part of Office 365. Native communications can also be utilized through Office 365. Dynamics 365 offers artificial intelligence. On other companies’ platforms, customers may suffer from fragmented solutions. This increases costs due to lower efficiency and productivity.


Digital Transformation

Customers may consider DocuSign, Inc. (NASDAQ: DOCU) or Dropbox, Inc. (NASDAQ: DBX) for fulfilling their various digital-transformation needs. But MSFT has decades of experience and offers custom solutions for its big customers.

At its Business Apps Summit, Microsoft introduced its integrated tools for digital transformation. Among those tools are the Dynamics 365 Virtual Agent, new AI capabilities that were added to Power BI, and general improvements to both Power BI and PowerApps.

PowerApps is a great opportunity for MSFT and MSFT stock. The company can easily get many more developers to enhance PowerApps. As more enterprise applications are developed on the platform, revenue from this segment will grow considerably, providing another positive catalyst for MSFT stock.

Valuation

23 analysts have an average price target of $144 on Microsoft stock, per Tipranks. That’s a conservative target, as it’s  just 6.6% above the current price of MSFT stock. But on the other hand, the valuation of MSFT  stock is on the high end, as its price-earnings ratio is about  30. And a 5-year EBITDA Exit model suggests a similar fair value for Microsoft stock of around $142.

The Bottom Line on MSFT Stock

Microsoft stock has been on an uptrend throughout 2019. Except for elevated valuation risks, there’s  no reason for Microsoft stock to fall. Those looking for a solid technology stock should consider buying Microsoft. The stock will be especially attractive if it happens to dip to $120 – $125.

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

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