Stock (Symbol)

Microsoft (MSFT)

Stock Price

$55

Sector

Technology

Data is as of

February 2, 2016

Expected to Report

Apr 21

Company Description

Microsoft Corporation is engaged in developing, licensing and supporting a range of software products and services. The Company also designs and sells hardware, and delivers online advertising to the customers. The Company operates in five segments: Devices and Consumer (D&C) Licensing, D&C Hardware, D&C Other, Commercial Licensing, and Commercial Other. The Company’s products include operating systems for computing devices, servers, phones, and other intelligent devices; server applications for distributed computing environments; productivity applications; business solution applications; desktop and server management tools; software development tools; video games; and online advertising. It also offers cloud-based solutions that provide customers with software, services and content over the Internet by way of shared computing resources located in centralized data centers. It provides consulting and product and solution support services. Source: Thomson Financial

Sharek’s Take

Microsoft (MSFT) is a changed company, with multiple growth stories. It’s popular Office product is new an improved. Office 365 is cloud based, let’s users log in via multiple computing devices, and updates automatically. Subscription revenue is where the money as, as this gives MSFT a stable recurring revenue stream instead of waiting around for the next Office product to kick-start sales. Last qtr, Office 365 revenue was up 70% yoy last qtr (wow). Azure, Microsoft’s cloud component, had 140% revenue growth and is also subscription based. Azure competes with Amazon Web Services, is 1/4 the size, but growing faster. The Surface tablet is a third catalyst and had 29% growth on a constant currency basis last qtr. Microsoft is transitioning to more subscription revenue, and thus the numbers don’t look great (-3% sales growth last qtr) but the company is creating a stronger, more stable revenue stream. MSFT has an estimated long-term growth rate of 10% a year and pays a dividend of close to 3% for a 13% total estimated annual return (hypothetically). This stock gets a top rating of safety from Value Line and management bought back 1% of shares last qtr. I will add MSFT to the Conservative Stock Portfolio.

One Year Chart

MSFT stock has done very well the past year, even hitting an all-time high in January (one of the worst January’s ever). Although the P/E of 20 is double the Estimated Long-Term Growth Rate of 10%, the recurring revenue gives these earnings estimates more certainty. Earnings per share climbed 23% last qtr on a constant currency basis.

Fair Value

My Fair Value on this stock is 20x earnings, so we are not getting in at a discount here. Still, investors are liking what’s happening at Microsoft and giving it a high valuation for a reason. Maybe that reason is the stock’s going higher?

Bottom Line

Microsoft it back to its winning ways, and has state of the art products in Office 365, Surface, and Azure. I feel businesses will upgrade to the new technology — I know my company will — and this will give MSFT a nice revenue stream for years to come. Microsoft will be added to the Conservative Stock Portfolio and will rank 18th of 34 stocks in the Power Rankings.