Microsoft Stock: Down 12%, Is MSFT Worth the Risk?

Here's how Microsoft's decline could be a sign of investor confidence

   

While market corrections provide lots of opportunities for investors, it’s extremely tough to gin up the courage to press the buy button. But hesitation can cause you to miss out on a value in the making, and this is why it often makes more sense to focus on the solid plays. One that looks very interesting right now is Microsoft Corporation (MSFT).

Microsoft Stock: Down 12%, Is MSFT Worth the Risk?Microsoft stock is off about 12% this year, but the carnage hasn’t been too bad consider the S&P 500 is down nearly the same amount.

If anything, this is a sign of overall confidence — despite the extremely negative sentiment on Wall Street. Then again, Microsoft stock has a lot of potential advantages to offer investors.

First of all, the company has a balance sheet that could survive just about any economic calamity. During the latest quarter, MSFT posted revenues of $23.8 billion and operating income of $6 billion. Not to mention Microsoft is one of the few companies with a AAA credit rating.

And Microsoft’s franchise businesses are continuing to show strength: Windows 10 now boasts over 200 million active devices, which represents the fastest adoption rate in the platform’s history.

This is critically important since there will likely be many add-on monetization opportunities. Just some examples include Windows Store, search advertising and gaming. Interestingly enough, in the latest quarter MSFT signed plenty of top-tier partners like Netflix (NFLX), Pandora (P) and Uber.

But of course, the main story for investors in MSFT stock is transformative CEO Satya Nadella. For the most part, he has wasted little time in leveraging the company’s core technologies to make the shift to the cloud.

Already MSFT is benefiting with Office 365, which now has a base of 20.6 million consumer users. And mobile apps have shown strength, with the apps for Office and Skype exceeding 340 million and 900 million downloads, respectively.

There has also been traction with Dynamics, a customer relationship management system, which saw an 11% jump in revenues in the latest quarter. Actually, there has been double-digit growth for the past five quarters.

Next, MSFT has enjoyed tremendous success with its cloud infrastructure platform, Azure. Azure is similar to Amazon.com’s (AMZN) successful Amazon Web Services, although MSFT has some advantages, such as the ability to provide on-premise cloud services, which has been helped with partnerships with operators like Dell, Red Hat (RHT) and Hewlett Packard Enterprise (HPE). Another success factor is that the company has a network of over 3.8 million developers.

Bottom Line on Microsoft Stock

Transitioning to the cloud is far from easy, as seen with the struggles with companies like Oracle (ORCL) and IBM (IBM). But Nadella’s leadership has been spot-on, which should be a long-term spur for MSFT stock.

In the latest quarter, the revenue run-rate on commercial cloud revenues was $9.4 billion, up a sizzling 70%.

What’s more, Microsoft stock is not expensive either, with the forward price-to-earnings ratio at 16. By comparison, Salesforce.com (CRM) has a multiple of 54 and SAP (SAP) trades at 17 times forward earnings.

But over the long term, the cloud is likely to be a strong tailwind for MSFT stock.

In other words, investors looking for a relatively safe way to play this trend, this entry point looks pretty good.

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.

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Article printed from InvestorPlace Media, http://investorplace.com/2016/02/microsoft-stock-msft-cloud/.

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