The Status of Microsoft Stock Should Rise
Microsoft (NASDAQ:MSFT) is dead; long live Microsoft! The company has transformed itself from a PC-era software company into one of the most dynamic cloud firms. While the price of Microsoft stock primarily reflects this transformation, the time has come for Wall Street to give this “M-FAANG” stock the respect it deserves.
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MSFT Keeps Growing Massively Despite Its Large Size
I will admit that I long derided MSFT as a monopoly resting on the laurels of a mediocre PC operating system. I also think if Bill Gates or Steve Ballmer still led Microsoft, it might still have the same status. The good news for the owners of Microsoft stock is that the old Microsoft no longer exists. The new MSFT is not only alive and well, but defying assumptions.
The law of large numbers states that the larger something becomes, the harder it becomes for it to maintain high-percentage growth rates. MSFT has managed to push the limits of this assumption. As InvestorPlace columnist Luce Emerson stated, MSFT increased its net income by 137% in its fourth quarter that ended in June. She also pointed out that the company’s Azure cloud platform remains a competitive threat to Amazon’s (NASDAQ: AMZN) cloud business, as Azure delivered 64% year-over-year growth. MSFT’s other divisions have also held up, as MSFT’s revenues increased by 12% overall in Q4.
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Time to Start Talking About “M-FAANG”
MSFT stock owes its recovery to the company’s CEO, Satya Nadella, and his dramatic move into the cloud. Consequently, I think the time has come to lump Microsoft in with the FAANG stocks — Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), and Google-parent Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG). The new “M-FAANG” group would consist of the top stocks in tech.
But from a certain point of view, MSFT may not regard that as a compliment, since it would become one of only one of two M-FAANGs not currently facing an antitrust probe by the Justice Department.
However, today’s MSFT is less of a monopoly now than at any other time in its history. And despite that, MSFT now has a market cap of $1.04 trillion, higher than all of the other FAANG companies.
Do Not Buy MSFT Stock Yet
At this stage, the worst thing I can say about MSFT stock is that it appears fairly valued. I would not describe its forward price-earnings (PE) ratio of 23.4 as inexpensive. However, since analysts, on average, expect its profit growth to rise 10.1% this fiscal year and 13.4% next fiscal year, I would not write MSFT off as a stodgy Dow 30 stock.
Moreover, the old MSFT stock did not pay dividends. Today’s Microsoft has hiked its payout for 15 straight years. Its yield of around 1.3% will not, by itself, convince investors to buy the shares. Still, given the company’s AAA credit rating and $133.82 billion cash hoard, its payout and future dividend increases are among the safest bets in the realm of dividend stocks. Still, while long-term investors should hold onto MSFT, buying Microsoft stock at its current levels isn’t worthwhile.
Concluding Thoughts on Microsoft Stock
Investors may not want to buy Microsoft stock, but they should start thinking of it as a top tech stock and as a member of the new M-FAANG group.
MSFT continues to achieve double-digit-percentage growth despite its massive size. Moreover, its reduced exposure to China and the fact that U.S. antitrust authorities have lost interest in the company bodes well for the tech giant.
At its current price, I see Microsoft stock as neither a great nor a terrible investment. I do not expect it to be completely immune from the current swoon of the stock market. But if MSFT falls into bear-market territory, investors should consider buying this M-FAANG stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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