Stock (Symbol)

Microsoft (MSFT)

Stock Price

$72

Sector

Technology

Data is as of

June 6, 2017

Expected to Report

Jul 20

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. Source: Thomson Financial

Sharek’s Take

Microsoft (MSFT) is climbing higher as other investors are clamoring for tech stocks. MSFT came in with a surprising 18% rise in profits last qtr, which cruised past the 13% estimate as sales increased 6%. Here’s the breakdown of sales (rounded) and growth by division.

Productivity & Business Processes — Office commercial, Skype for Business, Linkedin. Sales of ~$8 bill a qtr, up 22% with the help of LinkedIn.
Intelligent Cloud — Cloud services & consulting. Sales were ~$7 bill last qtr, up 11%.
More Personal Computing — Windows, Surface, Xbox, video game royalties. Revenue of ~$900 bil down 7% last qtr as Surface rev was -25%.

Microsoft has a lot of growth areas, including cloud storage, Office 365 (which allows people to log-in from anywhere to view files and emails) and the Xbox video game franchise. Video games are becoming 3D and lifelike, and there’s huge growth opportunity here. MSFT along with Johnson & Johnson are the two safest stocks in the world. The high level of stock safety and recurring revenue sources make it so MSFT deserves a P/E much higher than its growth rate (the Est. LTG is just 9% per year). My Fair Value is 20x earnings, which is $66 a share. With tech stocks on a roll, MSFT is selling above that right now, but with momentum strong I wouldn’t be a seller of this stock.

One Year Chart

Last qtr MSFT delivered 6% sales growth and 18% profit growth which beat the 13% estimate. Before you get impressed with the 18% profit growth you need to know qtrly profit Estimates for the next 4 qtrs are: 3%, 3%, 8% and 10%. But MSFT has beaten the street the last 4 qtrs (the qtr before that it disappointed). The P/E of 22 is high, I think. The Est. LTG of 9% per year is below the 10% I like to see in conservative stocks.

Fair Value

My Fair Value on this stock is 20x earnings, which gets us to a price of $66. MSFT has a fiscal year end June 30th so I’m looking ahead to 2018 to calculate my Fair Value. MSFT’s annual profit estimates have been inching higher and that continues my Fair Values will go up as well.

Bottom Line

Microsoft stock has successfully transformed itself from a company depending on PC sales into a company with multiple revenue streams in growing areas including cloud computing, video games, tablets, social media (LinkedIn) and digital calls (Skype). But what differentiates the FANG stocks is they possess faster revenue growth, which can easily be converted into rapid profit growth. So MSFT isn’t on FANG’s level. But this is one of the safest stocks in the world and that makes it a great selection for more conservative investors. Microsoft ranks from 26th of 34 stocks in the Conservative Stock Portfolio Power Rankings as it doesn’t seem to have much upside after the last year’s run-up.