Nothing says slow and steady like Microsoft Corporation (NASDAQ:MSFT) — at least when it comes to share prices. MSFT stock had been trading in a range of $60 to $65 for nearly four months, but a push higher Friday has sent shares to a 7% gain year-to-date and fresh all-time highs.
Is something about to give?
Since former CEO Steve Ballmer stepped down and Satya Nadella stepped in, Microsoft has become a bigger growth play than some investors may realize. Its emphasis on the cloud still seems to be underrated, with its Azure revenues climbing 93% last quarter. Its commercial businesses are also doing well.
Microsoft’s Office consumer products and cloud revenues remain strong, too. And while Microsoft does have good things going for it, some investors wonder if it’s enough to really sustain MSFT stock at these levels.
Of Course! People Love MSFT Stock
Microsoft is one of the ultimate buy-and-hold stocks. It’s funny how many investors continue to think of MSFT as an old-school tech dinosaur. Despite its robustly growing cloud business and acquisition of LinkedIn, many still miss the positives.
In the past 10 quarters, Microsoft has missed just one earnings estimate, and it hasn’t whiffed on revenues at all. Looking forward, analysts expect ~5% and 7.8% sales growth in 2017 and 2018, respectively. EPS growth expectations of 6.5% in 2017 are just okay, but 10.1% growth in 2018 is solid.
MSFT’s dividend yield of 2.4% is also attractive, given that 10-year Treasuries currently pay about 2.2%. The yield has been higher in the past, but the stock’s appreciation has caused it to shrink. Investors once griped that they’d trade some yield in exchange for more growth, and it seems they might be getting their wish.
The one issue for MSFT stock is valuation — and it’s an odd one, as bears and bulls alike can make a solid case.
Bulls will argue that a forward price-to-earnings ratio of 20 isn’t too bad for Microsoft. The company has steady growth and should do even better over the next few years, and it has one of the sturdiest balance sheets in the tech sector.
Bears will argue that earnings growth of 6.5% is simply not enough to justify such a lofty valuation, nor is the expectation for 10% earnings growth in 2018. Those numbers need to be significantly higher to rationalize this type of valuation.
How to Deal With MSFT Stock at These Levels
The bulls have another thing going for them when it comes to valuation: long-term investors.