At the start of this decade, there were some concerns that the innovation curve at Microsoft (NASDAQ:MSFT) was falling flat, and that the company was growing stale, resting on its laurels, and becoming increasingly irrelevant in a rapidly changing big tech landscape. As a result, there was something of a lackluster enthusiasm for Microsoft stock
Source: Johannes Marliem Via Flickr
Then, just over seven years ago, in February 2014, Satya Nadella succeeded Steve Ballmer as the CEO of Microsoft. He promised change. Specifically, he promised to shift Microsoft’s focus to cloud services, and in so doing, returning Microsoft not just to big tech relevancy, but once again make Microsoft one of the most important companies in the world.
He’s done just that. Microsoft is once again one of the largest companies in the world, and its stock has risen 250% since early 2014.
Will this big rally in MSFT stock continue? Yes. For four very simple reasons.
Four Reasons to Love Microsoft Stock
First, the big cloud pivot isn’t over just yet, and Microsoft’s many cloud businesses continue to fire on all cylinders.
Second, every other business at Microsoft continues to move in the right direction, and make revenue and profit gains.
Fourth, the valuation underlying MSFT stock remains reasonable relative to long term growth prospects.
Net net, cloud growth plus tangential business growth will drive continued revenue and profit growth over the next several years. The lack of a regulation threat means that this growth trajectory has tremendous clarity. At the same time, the valuation is reasonable enough to allow for that growth to drive healthy share price gains.
The takeaway? Stick with Microsoft stock for the long run.
The Cloud Business Is Firing on All Cylinders
The first, and most important, reason to stick with MSFT stock is that the company and stock’s biggest driver – the cloud business – remains on fire.
The cloud pivot has been the core of Microsoft stock’s big 250% rally since early 2014. This pivot is far from over. Last quarter, commercial cloud revenue rose more than 40%. That’s a big growth rate. It won’t head much lower anytime soon. Only 20% of enterprise workloads have migrated to the cloud. That number will move towards 100% in the long run, meaning that the global cloud market still has a long runway for growth.
Further, Microsoft continues to innovate and expand share in that market, meaning Microsoft cloud growth rates should continue to outpace cloud market growth rates. Thus, with Microsoft, you have a leading cloud player that’s growing share in the secular growth cloud market. Ultimately, that means Microsoft’s cloud business will continue to fire off 20%-plus growth quarters for a lot longer.
All Other Businesses Are Moving in the Right Direction
Although the core cloud businesses steal the spotlight at Microsoft, the company’s other businesses are actually doing very well, and will continue to support higher prices for the stock.
On the gaming front, Microsoft just announced its next-gen Xbox console, dubbed “Project Scarlett”, which is set to be four times more powerful than its predecessor, the Xbox One X. Microsoft is also testing the waters in the cloud gaming world with its “Project xCloud” video game streaming service.
Meanwhile, on the office products front, Microsoft just incorporated real-time financial data into Microsoft Excel spreadsheets, a move that could help offset the subtle migration from Microsoft Excel to Google Sheets.
All in all, it isn’t just Microsoft’s cloud business which is doing really well right now. All of Microsoft’s businesses are doing well.
The Company Is Side-Stepping Big Tech Regulation
Importantly, Microsoft does not have the regulation risks which are weighing on fellow big tech stocks.
There are five big tech stocks in the U.S. which have $500 billion-plus market caps – Microsoft ($1 trillion market cap), Amazon ($930 billion), Apple ($900 billion), Alphabet ($760 billion), and Facebook ($535 billion). Of those five big tech giants, Microsoft is the only one not being probed by either the FTC or DoJ for anti-competitive reasons.
From a market psychology perspective, that’s a big deal. Investors with Amazon/Apple/Alphabet/Facebook exposure may not want that exposure anymore because of the regulatory risks, but because the tech growth narrative remains vigorous, those investors will still want big tech exposure. Where can they get big tech exposure without the regulation headwind? Microsoft is the only place.
Consequently, we could see a migration of investment dollars from other big techs stocks to MSFT stock as regulation headwinds build.
Valuation Remains Reasonable
Lastly, the valuation underlying Microsoft remains reasonable relative to the company’s long term growth prospects.
Microsoft stock trades around 29-times forward earnings. That’s as rich as the valuation has been in the past decade. But, growth is also as big as its been in the past decade. According to Street estimates, profits are expected to rise 18% this year, 11% next year, and 15% the following year.
In other words, Microsoft projects as a steady double-digit profit grower over the next several years, and that growth has tremendous visibility thanks to secular growth tailwinds in the cloud market and the lack of regulation risks. A near 30-times forward multiple for that magnitude of growth and that level of growth clarity seems reasonable.
Bottom Line on Microsoft Stock
Microsoft stock has been a big winner for the past seven years. It will continue to be a winner over the next several years, too, because the cloud business remains on the fire, the company’s other businesses are doing well, the growth trajectory has tremendous clarity, and the valuation remains reasonable.
As of this writing, Luke Lango was long FB, AMZN, AAPL, and GOOG.
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Source: Investors Place