It’s no longer the mid-1990’s, but if you’ve blinked, you might have missed how quickly Microsoft Corporation (NASDAQ:MSFT) transformed from a slow-moving bellwether to fast-growing tech company again.
And this time, Windows and Office — while still huge money makers for the company — are not the products doing the heavy lifting. And that bodes well for MSFT stock.
The Nadella Effect
New CEO Satya Nadella deserves much of the credit for the turnaround in Microsoft and MSFT stock. Since Nadella was was appointed as CEO on Feb. 4, 2014, Microsoft shares have skyrocketed as much as 75%, when factoring its 52-week high of $64.10 reached on Dec. 23.
That comes out to 25% annual returns. And for a number of catalysts currently in play, MSFT stock is poised to reach $75 in the next 12 to 18 months, delivering some 25% returns.
Not only has the market rewarded Nadella for moving Microsoft toward high-growth areas such as the cloud with Office 365 and the company’s dominant Azure platform, Nadella has — in the process — made investors forget Microsoft’s failures under former CEO Steve Ballmer. Notably, missing out on mobile and being surpassed by the likes of Apple Inc. (NASDAQ:AAPL) and Samsung Electronics (OTCMKTS:SSNLF).
But thanks to Nadella’s strong pulse on the company, Microsoft won’t miss out on anymore opportunities.
The M&A Effect
Take, for example, last week’s acquisition of Simplygon, a company that develops 3D-optimization solutions for video game developers and other industries that need to visualize 3D data. Microsoft didn’t reveal how much it paid for Simplygon, not that its price is important. What matters is the extent to which this deal can help Microsoft leverage its existing “3D to everyone” initiative, which makes it easy to capture, create and share in 3D images.
The deal for Simplygon follows last Friday’s deal for artificial intelligence (AI) startup Maluuba, which specializes in deep learning and reinforcement learning. And to say nothing about its $26.2 billion blockbuster deal for LinkedIn Corp, which closed in December.
With almost $140 billion in cash on its balance sheet, there’s not much Microsoft can’t afford. And Satya seems determined to deploy the company’s cash to ensure Microsoft’s growth never peaks.
Bottom Line on MSFT Stock
Microsoft stock — currently priced at a forward price-earnings ratio of just 19 — deserves a higher multiple. With growth opportunities emerging in the realm of Internet of Things, smart homes, the cloud and now 3D and AI, MSFT stock — despite trading near all-time highs — still looks attractive.
The LinkedIn deal, which exposes Microsoft to a new set of growth areas such as advertising, putting it in the realm of Facebook Inc (NASDAQ: FB), deserves an additional three to four points above Microsoft’s current P/E.
Looking out to the next 12 to 18 months, MSFT stock is poised to reach $75, when assigning a P/E of 23 (compared to Facebook’s 24) to fiscal 2017 estimates of the $3.27 per share.
Aside from delivering 10% earnings growth in 2017, MSFT stock pays a 2.5% dividend yield, making it one of the better bargains in tech.
As of this writing, Richard Saintvilus did not hold any a position in any of the aforementioned securities.
