Today’s Microsoft Corporation (NASDAQ:MSFT), under the cool-headed guidance of Satya Nadella, is practically unrecognizable from the MSFT under Steve Ballmer’s tutelage.
Microsoft now creates apps for competing devices, optimizing Office for mobile on iOS and Android as part of its “mobile first, cloud first” strategy.
The Redmond, Washington, company has taken its credo to heart, trying new things across the board such as Mary Ellen Smith, MSFT corporate vice president, electing to hire autistic workers for their unique skillset.
But MSFT stock has yet to recover from the double-digit drubbing it took in January when it rattled shareholders by cutting its earnings outlook and missing its quarterly forecast.
Is Microsoft strong enough to rise again and top $50? I think so, and here’s why:
5 Reasons Microsoft Stock Will Top $50: Streamlining
Microsoft is well through its plan to cut 18,000 jobs, reinforcing the tech giant’s commitment to change on a deep structural basis.
After MSFT purchased the Nokia Corporation (ADR) (NYSE:NOK), NOK workers spilled over into MSFT, and the layoffs are a way of correcting indigestion in MSFT’s ecosystem.
Microsoft is streamlining into a slightly smaller, more focused organization, as confirmed in an email from Microsoft chief information officer Jim DuBois that notes the need to eliminate “role overlap” and to “optimize activities and functions.”
This corresponds to Nadella’s statement when the cuts were announced, in which he expressed the need to have “fewer layers of management, both top down and sideways, to accelerate the flow of information and decision making.”
It’s like Shah Gilani noted to Private Briefing readers:
“Look, this company isn’t sick, isn’t dying – and certainly isn’t dead…it’s actually remaking itself right before our eyes. It’s doing so very smartly. And it’s doing so in a way that has almost hidden a big-profit opportunity in plain sight.”
5 Reasons Microsoft Stock Will Top $50: Partnerships
The IDC expects the Internet of Things market to peak above the $7.1 trillion mark in five years. The sooner MSFT gets a foothold, the better.
Enter the DragonBoard 410c board computer from Qualcomm, Inc. (NASDAQ:QCOM) running Windows 10. QCOM’s device is faster than MSFT’s own Raspberry Pi 2, and while more expensive, its ability to power anything from wearables and smart home devices to robots and drones puts Microsoft in a better position to capitalize off the Internet of Things market.
With QCOM in its corner, MSFT shields itself against the threat posed by competitor ARM Holdings plc (ADR) (NASDAQ:ARMH). Microsoft’s own Raspberry Pi 2 chip featured a 32-bit processor, the kind ARMH’s superior mBed 32-bit OS was putting out of commission.
Putting Windows 10 on a 64-bit device like the DragonBoard 410c gives MSFT a clear advantage against ARMH, as even the disruptive mBed OS can’t compete on the more demanding 64-bit architecture.
5 Reasons Microsoft Stock Will Top $50: Sentiment for MSFT is Growing
Analysts are smitten with this new Microsoft.
Wells Fargo & Co recently upgraded MSFT to “outperform”, giving Microsoft stock a price target of $46 to $50. Those numbers are teetering dizzyingly close to Microsoft’s $53.98 price just before the dot-com crash.
While Goldman Sachs considered Microsoft stock overvalued and slapped it with a “sell” recommendation, Wells Fargo thinks MSFT stock has corrected for its previous high estimate.
Wells Fargo cited improved “sentiment and perception” among the many reasons to like MSFT:
“In our view, management is making sound moves that should benefit the business in the intermediate and long term. We think the strategic position has improved with the new cloud/mobile product introductions, the “software anywhere” cross-platform approach, and disciplined cost controls…We like the new Microsoft.”
If MSFT continues to grow at 20% over the next year, a seriously conservative estimate could nail down EPS at $2.48, giving Microsoft stock a price of roughly $43, which is roughly where the stock is right now.
Now that analysts are catching on to the huge opportunity that might be hidden in MSFT, however, even their currently reigned in EPS trends aren’t looking like too much of a long shot, putting Microsoft stock squarely at the $50 mark.
5 Reasons Microsoft Stock Will Top $50: Dividend Growth
MSFT has a forward dividend yield of 3.1%, higher than the average technology yield. Microsoft increased its dividend for 11 consecutive years, and has 19.1% annualized growth over the last three years.
And while investors may have more dividend increases to look forward to as MSFT reports earnings on Tuesday, the question on everyone’s mind is just how capable is MSFT of maintaining growth in its attractive dividends?
Very capable, it turns out. Microsoft has more than $85 billion in cash and short-term investments, and total current assets exceed $114 billion. Divide by its current liabilities and MSFT has a cash ratio of 1.88, or, plenty of cash to alleviate its debts and consistently increase its dividends.
5 Reasons Microsoft Stock Will Top $50: MSFT Surface
New ventures into IT enterprise with cloud computing, coupled with the impending release of Windows 10 and MSFT pushing low-cost bundles of Office 365, Xbox Live and Skype could help MSFT increase its bottom line exponentially over the next few years.
But with MSFT’s “mobile first, cloud first” strategy, it’s the Surface that should give MSFT revenue a solid kick in the pants, as the 40-year old company avoids competing with the Apple Inc (NASDAQ:AAPL) iPad, opting instead for a tablet capable of acting as your main PC.
Revenue from Surface Pro is healthy as is — last quarter’s Surface sales represented 4% of Microsoft’s total revenue. The new Surface, however, has a generous entry-level price of $500, the same entry-level cost as an iPad Air 2, but with more to offer for students and professionals interested in going mobile but not ready to give up their laptop or desktop capabilities.
Microsoft is now readying an improved Windows 10 OS with the much ballyhooed Internet Explorer replacement, code-named “Spartan”. As long as MSFT can deliver, it’s very reasonable to expect Microsoft stock to relive its glory days.
As of this writing, John Kilhefner did not hold a positon in any of the aforementioned securities.
