Is Microsoft Stock a Buy?
Microsoft (NASDAQ: MSFT) stock has had an amazing run under the leadership of CEO Satya Nadella. The company’s shares are up nearly 500% since Nadella took over from Steve Ballmer in February 2014, far surpassing the S&P 500return of 110% over the same period.
But some investors are starting to wonder if the stock has run too far too fast and is now too expensive. This is understandable, as the growth in the share price means the company now has capital of $ 1.6 trillion. market capitalization. Other investors, especially those with a long-term view, are not at all worried and are still convinced that the company has a long way to grow. Let’s see why these investors are more likely to be right.
Repositioning focused on mobile and cloud
Nadella’s biggest move when he took over was to reposition Microsoft away from Ballmer’s manic focus on devices, which led to a disastrous Surface RT deployment and even more catastrophic acquisition of Nokia’s smartphone business, to become a “mobile first, cloud first” company instead.
As for the mobile-centric strategy, Nadella worked to refine the existing Microsoft Office iPhone app and released Office for iPad a few months after its takeover. Movements like this have opened up new markets for its products. An even bigger shift involved Nadella who championed the transition of Office software from a licensing model to a software as a service (SaaS) model. The new software suite, now called Microsoft 365, allowed for recurring billing and a much more consistent revenue stream from a very popular product.
This change always pays off for the company. In fiscal 2020, Microsoft reported 13% revenue growth in its full-year productivity and business process segment, driven by Office Commercial and Consumer subscriptions. Microsoft’s use of its Azure cloud is the basis for moving to a SaaS model. There have been recent poke fun at the slow growth of Azure, but the company continues to grow Azure by almost 50%.
Microsoft’s future looks bright – and cloudy
The future looks bright for this seasoned company. The expansion into artificial intelligence and Internet of Things (IoT) services and products is only just beginning. According to IDC estimates, the massive amounts of data needed to bring autonomous vehicles, robots and other devices online will require 175 zettabytes (each zettabyte is 1,000 billion gigabytes) of global data by 2025. The the most economical way is to store it all. the necessary data resides in the cloud, securing growth opportunities for cloud leaders like Microsoft Azure and Amazon Web Services (AWS) for years to come.
After starting out at a distant second place in terms of market share, Microsoft Azure continued to reduce AWS ‘lead in cloud computing, primarily due to its stronger full-stack offering. from the basic level of infrastructure as a service (Iaas) to the end user SaaS product. This benefit is important because AI will require more than just storage. Cloud providers capable of offering a full set of business intelligence and data analysis tools will continue to gain market share in this industry.
Microsoft is expensive, but still a buy
The main argument against buying Microsoft shares at the moment is based on valuation. Valuations across the board, but especially in tech, have been stretched due to the rush to invest in the stock market caused by near zero interest rates. Microsoft is currently trading at 35 times earnings, which is at the top of its historic 10-year valuation.
Despite this high valuation, Microsoft is not that expensive compared to the overall market. The S&P 500 Currently trading at 38.3 times earnings and hasn’t produced as much stock price growth (on average). The S&P 500 as a whole is also showing negative growth rates right now; Microsoft is expected to increase its already huge revenue by around 10% in the current fiscal year. Don’t fear Microsoft’s massive market capitalization; the company has the necessary elements to continue to post growth in turnover and results for the years to come.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.