Microsoft Corp. (MSFT) has seen its stock rally about 3% in the last week or so, in part thanks to recent restructuring news but also in anticipation of upcoming earnings.
That means now may be a great time to buy into MSFT stock before it moves even higher after a strong report.
Yes, Microsoft stock still leaves a sour taste in many investors’ mouth after more than a decade of pain dating from the dot-com crash to mid-2013.
But changes at Microsoft as of late have been substantial — and I’m not just talking about the $7.6 billion write-down related to the purchase of Nokia’s smartphone arm or 7,800 layoffs related in large part to the troubled division.
This is decidedly not the Microsoft of years past, and investors who are objective about the tech giant will see big-time opportunity in MSFT stock.
MSFT Stock – Change for the Better
If you’ll recall, last year there was a larger plan announced to cut 18,000 jobs across all device and services divisions. As I wrote at the time, the moves were proof that “new Microsoft CEO Sataya Nadella is more of a wartime leader than a passive figurehead, willing to make hard choices and look objectively at the company instead of with rose-colored glasses.”
Closing the books on an ill-fated Nokia acquisition keeps with this mission of moving forward.
It’s not just owning up to mistakes that makes Microsoft a good buy, of course. There has been strong momentum for the stock ever since Nadella took over at the beginning of 2014. Shares hit a snag in January when Microsoft earnings rattled investors and sparked a roughly 10% decline thanks to weaker short-term growth prospects. But strong MSFT earnings in April vindicated the company with news of tremendous growth in its cloud computing division.
Shares bounced back impressively, and analysts have been decidedly bullish since then. In the wake of Q3 Microsoft earnings in April, RBC reiterated its “outperform” rating and put a $54 target on MSFT stock. More recently, UBS reiterated its “buy” rating on July 10 with a $52 target.
That’s roughly 15% to 20% gains from here, based on those price targets for MSFT, and some of that pop could assuredly come from the upcoming Microsoft earnings report, should a strong hardware and cloud sales continue to be the theme.
What’s Next for Microsoft?
Wall Street seems to be a believer in MSFT stock. But beyond just next week’s earnings, there are reasons to think optimism will stay high going forward.
Most importantly for 2015 performance, the Windows 10 release could be a huge driver of sales if successful. There’s also Halo 5 video game coming this fall, the latest chapter in a wildly successful Xbox title that has moved 65 million copies across all of its various platforms over the last several years. Halo 5 could have the additional benefit of spurring more Xbox One sales.
Furthermore, success with Surface seems to be real, as the gadget is increasingly positioned as a work-focused laptop replacement and not a competitor with the iPad from Apple Inc. (AAPL). Sales continue to march steadily higher, including a 44% surge last quarter, and we likely will see another encouraging lift in Surface sales this earnings report, too.
Throw in the fact that MSFT stock boasts a 2.7% dividend yield with a strong record of dividend growth, with payouts nearly quadrupling in the last 10 years from 8 cents quarterly in 2005 to 31 cents currently, and you’ve got a pretty compelling case to stick with Microsoft.
Admittedly, new products like Windows 10 and the efficiencies from recent cost-cutting won’t be fully reflected in the latest Microsoft earnings report.
However, Wall Street is increasingly optimistic and even mildly encouraging details in the upcoming Microsoft earnings report could spark a move higher in anticipation of future success — particularly after expectations were lowered in January.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
