Is Microsoft Stock a Buy in 2016? – MSFT Pros & Cons

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Microsoft Corp. (MSFT) has been getting its groove back. During the past year, Microsoft stock is up about 14%. By comparison, many of the old-line tech operators have been laggards. Consider that Oracle (ORCL) is off 5% in the last 12 months, IBM (IBM) is down 12% and Qualcomm (QCOM) is off an ugly 36%.

Microsoft MSFT stockThen again, MSFT has spent the past few years retooling its business – and the results are coming in quicker than expected via both improvements in the product line as well as a rising Microsoft stock price.

“Microsoft has a strong leader in Satya Nadella,” said Vineet Jain, who is the co-founder and CEO of Egnyte. “He’s positively impacting shareholder value by transforming the company into one of the leading players in the cloud space.”

OK then, so what about the future? Is Microsoft stock still a good value here? Or is it better to instead hold off? To see, let’s take a look 3 pros and cons of MSFT as we enter 2016:

Pros of Microsoft Stock

The Cloud: So far in 2015, the run-rate for the cloud business of Microsoft Stock is over $8.2 billion, up about 70% on a year-over-year basis. Actually, MSFT expects it to reach a hefty $20 billion during the next couple years.

Then again, the underlying infrastructure is built for global scale. Keep in mind that the MSFT cloud platform includes over 20 regions, which is larger than any other company.

But there is another advantage, which sets the company apart from rivals like Amazon (AMZN) and Google — or rather, Google’s parent Alphabet (GOOG, GOOGL). That is, MSFT provides hybrid solutions for customers. This means there is the ability to use the cloud and traditional on-premise software, so as to provide the most efficient results. Consider that AMZN and Google/Alphabet are essentially pure cloud players.

Finally, the MSFT cloud platform is likely to provide a nice foundation for growth areas like analytics and big data. “Microsoft has invested heavily in premier developer talent and is beginning to incorporate and monetize open source initiatives,” said Peter Wang, who is the CTO and co-founder of Continuum Analytics. “For instance, to court data scientists, the company launched the AzureML big data platform and immediately acquired Revolution Analytics.”

Productivity and Business Process Applications: Not long ago, the Office franchise looked like a doomed commodity. But not anymore. Microsoft stock has moved to the cloud and adding key features to this software like collaboration. As a result, Office has become a nice driver for growth at MSFT stock. In fact, Office 365 – which is the cloud version – has 18 million paid consumer subscriptions, up by 3 million in the most recent quarter. That’s on top of 60 million commercial users to boot.

But mobile has also been critically important. Actually, Office Mobile is one of the hottest apps in the world, with over 200 million downloads. Part of the success has been from strong R&D investments but MSFT has also been savvy with acquisitions. Just some include deals for apps like Acompli, Wunderlist, Sunrise and MileIQ.

Windows: Yes, it’s true. If anything, Windows may ultimately be the secret weapon that provides more fuel for the Microsoft stock price.

The reason? MSFT stock is giving away Windows 10 to all users of versions 8 and 9. All in all, this should help propel adoption, which is already over 110 million as of early October (the launch came in mid-summer).

For the most part, Windows is likely to be smart way to upsell users to cloud software as well as to use Bing search services (there is a search box at the lower left side of the screen). To this end, Bing is already showing signs of a nice lift. In the latest quarter, revenues shot up over 29% to over $1 billion and the business is profitable.

Cons

The PC Business: While Microsoft stock is doing a good job swimming upstream, the secular decline of the PC business overall is a big drag on the business as more and more people focus on mobile phones and tablets. According to IDC, there was a steep 10.8% decline in worldwide shipments in Q3, on a year-over-year basis. In fact, the firm believes that over 30% of today’s IT vendors will disappear within five years.

Granted, MSFT has taken moves to lessen its reliance on the PC business. However, the fact is that the segment is still a drag on overall performance. For instance, during the latest quarter, the Windows OEM non-Pro licensing revenues fell by 4% and the OEM pros unit was off by 7%.

Smartphone Business: This has been a disaster for MSFT. And there are few signs of any improvement.

Now a key to the strategy was the acquisition of Nokia’s handset business in 2014. But unfortunately, a year later MSFT took an $8.4 billion write down and laid off 7,800 people.

Going forward, the company is pinning its hopes on Windows 10 Mobile. Yet it will likely be extremely tough to get any traction as Google’s Android and Apple’s (AAPL) iOS have nearly 98% of the global market in Q3! Besides, these companies have the huge advantage of thriving ecosystems, such as with committed developers and a rich assortment of apps.

Valuation: With the jump in the Microsoft stock price, the valuation is now far from cheap. Consider that the forward price-to-earnings multiple is nearly 18X. By comparison, IBM sports a multiple of a mere 9X, QCOM is at 10X and Oracle is trading at 13X.

Besides, the dividend yield on Microsoft stock is also skimpy, at only 2.66%.

Bottom Line on Microsoft Stock

While MSFT is still a non-player with smartphones – and this will likely last for some time – the fact is that the company is showing tremendous momentum with important businesses like the cloud. And yes, this should be no surprise since the company has been making smart investments with R&D and acquisitions. Just look at cybersecurity, which MSFT has been spending over $1 billion a year on. The result is that the company has a highly trusted platform, which is key for success with the cloud.

And again, pursing the free-model with Windows could provide a nice boost as well. There may even be an unexpected increase in the Bing business. As Google has shown, search advertising can be extremely profitable.

OK, so should you buy Microsoft stock?

Yes — even though the valuation is a bit pricey, it is deserved because MSFT is positioned nicely to benefit from major market opportunities like the cloud, analytics and productivity apps.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2015/11/microsoft-stock-msft-2016/.

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