The turnaround at Microsoft Corporation (NASDAQ:MSFT) is certainly real. Since 2013, MSFT stock has gained a sizzling 135%. A key has been the strategic moves of CEO Satya Nadella — who has made a big wager on the cloud.
But is MSFT stock still a good way to play this major tech trend or has its investment potential been realized? You can count me firmly in the latter camp, as I think there is still lots of opportunity for Microsoft.
Granted, there are definitely other worthy players as well. Salesforce.com, inc. (NYSE:CRM) continues to grow at a strong pace. And yes, there are the old-line operators, such as Oracle Corporation (NYSE:ORCL), that are starting to get traction.
But MSFT has some clear advantages. If anything, a critical driver is that the company hasn’t played catch up in the cloud space … it’s become an innovator.
Besides, the cloud opportunity should still provide lots of room for growth. According to Gartner, the total global spending is forecasted to increase from $204 billion in 2016 to $318 billion by 2019.
OK then, what are some of the other reasons MSFT stock will continue to be a big-time beneficiary? Let’s take a look at three factors.
MSFT Stock Cloud Advantage: Infrastructure
Since the mid-1970s, Microsoft has focused on building software for core functions — such as operating systems — and productivity applications. This experience has certainly benefited the company’s cloud-computing efforts.
Here are some metrics to keep in mind:
- Office 365 has over 85 million MAUs (monthly active users), up 40% on a year-over-year basis.
- Outlook counts 45 million MAUs on iOS and Android, up 70%.
- 400 million MAD (monthly active devices) on Windows 10.
- Dynamics CRM Online paid seats grew by more than 2.5 times.
But MSFT has invested aggressively in boosting the features of its franchise platforms. They are not only fully-enabled for mobile systems, such as Apple Inc.’s (NASDAQ:AAPL) iOS and Alphabet Inc’s (NASDAQ:GOOGL, NASDAQ:GOOG) Android, but also leverage next-gen approaches like machine learning, predictive analytics and AI (artificial intelligence). A prime example of this is Cortana. This virtual assistant essentially gets smarter as more people use it! There are over 141 million MAUs.
Meanwhile, MSFT has been creating a global cloud infrastructure, which focuses on scale, reliability, security and compliance. There are 38 Azure regions — which represents the largest footprint of any company. The cloud platform is also not just about catering to MSFT technology. Instead, it is based on an open architecture, allowing for diverse technologies like Docker, Linux, Red Hat Inc (NYSE:RHT) and so on.
MSFT Stock Cloud Advantage: Growth
Every quarter, there has been encouraging progress with the cloud business for MSFT. In fiscal Q1, the Azure segment posted a 116% spike in revenues.
Granted, this business is a relatively small part of MSFT. But given the hefty growth rate, Azure will quickly become very strategic.
As for the overall cloud business, it was up about 8% to a hefty $6.4 billion in the latest quarter, making MSFT the No. 2 player in the market (according to Synergy Research Group). The current market share is 11%, which compares to Amazon.com, Inc.’s (NASDAQ:AMZN) 31%.
Going forward, MSFT wants to hit revenues of $20 billion by fiscal 2018.
MSFT Stock Cloud Advantage: M&A
For a company at the scale of MSFT, it is impressive to see that its internal efforts continue to produce strong product features and innovations. But to remain a leader, the company has also ramped up its dealmaking efforts. No doubt, there have been a variety of small deals, such as for Xamarin, MileIQ and Genee.
But more importantly, MSFT has not been afraid to do transformative acquisitions. Of course, the most obvious example of this is the $26.2 billion purchase of LinkedIn Corp. As a result, MSFT now owns the world’s largest professional online network, which has 467 million users (up 18% during the latest quarter). There are other assets like the Lynda.com learning system as well Recruiter, which allows companies to identify talent.
Finally, the dealmaking for Microsoft should get a boost from Donald Trump’s expected move to allow repatriation. This will allow the company to bring back a whopping $113 billion. This will not only provide lots of fire power for acquisitions but also for increases in buybacks of MSFT stock and dividend payments.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
