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LinkedIn Helps Microsoft’s Numbers Look Pretty

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Stock (Symbol)

Microsoft (MSFT)

Stock Price

$84

Sector
Technology
Data is as of
November 27, 2017
Expected to Report
Jan 30
Company Description
microsoft_logoMicrosoft 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
David SharekMicrosoft (MSFT) reported results that exceeded expectations last qtr, causing the stock to jump in the news. Still, I’m not real high on the stock, as I feel it’s gone too-far-too-fast and a lot of the growth can be attributed to the LinkedIn acquisition made last December. MSFT sales rose 12% last qtr, and LNKD accounted for almost 5% of growth. So looking ahead, the numbers might not be so rosy. Microsoft has a lot of growth avenues including cloud storage, Office 365 (which allows people to login from anywhere to view files and emails) and the Xbox video game franchise. Video games are becoming 3D and lifelike — there’s huge growth opportunity here. Microsoft has three main divisions (below), each around 1/3rd of sales. Here’s the breakdown of last qtr’s sales growth by division:

  • Productivity & Business Processes — Office commercial, Skype for Business, Linkedin. Sales up 28% vs. 21% last qtr. LinkedIn wasn’t included in the year-ago numbers, and without this extra push sales in this division rose 11% year-over-year (yoy).
  • Intelligent Cloud — Cloud services & consulting. Sales up 14% vs. 11% a qtr ago.
  • More Personal Computing — Windows, Surface, Xbox, video game royalties. Sales were flat yoy last qtr vs. -2% a qtr ago.

Wall Street loved the results, and pushed the stock up 5% after the results were announced. The stock’s been on a tear this year, and was on a steady climb higher after this recent pop. MSFT along with Johnson & Johnson are the two safest stocks in the world. The high level of stock safety, conservative accounting, big stock buybacks and fat dividend yield of 2% make it so MSFT deserves a P/E much higher than its growth rate (Est. LTG) of 11% per year. But with a P/E of 25, a lot of the good news is baked in. Still, I’m not bearish on the stock as management is underpromising to overdeliver, and with the company beating the street every qtr during the past year, it’s likely to continue on this trend — and get nice reviews after reporting. I’m pushing my Fair Value up from a P/E of 20 to a P/E of 22. But the stock now has a P/E of 25.  So in my eyes it’s a little high. I feel this $84 stock is worth $75. But I can’t recommend people sell, as the trend is your friend and the trend is clearly up. MSFT is a solid core holding in the Conservative Growth Portfolio.as its an excellent choice for conservative investors who need technology to balance out their portfolios.

One Year Chart
Last qtr’s profits rose 11% on a 12% rise in sales. Now the question is what would have profits rose without LNKD? Also, LNKD was acquired last December, so this qtr could be the last to get easy comparisons. Qtrly profit Estimates are 4%, 7%, -7% and 14%, with only the 3rd qtr out getting increased this qtr. The stock looks not only overvalued, but extended on the chart. I wouldn’t be a buyer here. The Est. LTG has increased from 9% to 10% to 11% a year the past 3 qtrs.
Fair Value
Microsoft accounts for stock options as an expense, thus its Fair Value P/E should be richer due to this. The company also gets a AAA rating, thus a should earn a premium P/E from that as well.  I feel a P/E of 22 is appropriate, and I think the stock could be around this price for 6 to 12 months. 2018 estimates have gone from $3.32 to $3.21 and $3.39 the last 3 qts, which isn’t all-that.
Bottom Line
Microsoft stock was stuck in a trading range from 2001 to 2013, and has successfully transformed itself from a company depending on PC sales into one with multiple revenue streams in growing areas including cloud computing, video games, tablets, and social media (LinkedIn). But I feel the recent rise in the stock is partially attributed to investors climbing aboard S&P 500 index funds — which mainly invest in large stocks in the S&P 500. MSFT ranks 24th of 32 stocks in the Conservative Stock Portfolio Power Rankings. It may take a break after this latest run, as the stock hasn’t had a correction in more than  year.
Power Rankings
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David Sharek David Sharek is stock portfolio manager and CEO of DavidSharek.com. David believes a company's profits ultimately drive the price of its stock. His book The School of Hard Stocks can be found on Amazon.com.