Who says you can’t teach an old dog new tricks? In spite of being a tech company that’s older than many of its employees, Microsoft Corporation (NASDAQ:MSFT) continues to impress. Under the leadership of CEO Satya Nadella, the company has focused on what works — software, subscription services, and especially, the cloud. Thanks to management’s concerted efforts, MSFT stock is running a healthy 18%-plus year-to-date.
If anybody is expecting any negative surprises, particularly with Microsoft earnings looming, I’d probably sit and reconsider. For the month so far, MSFT stock is up about 7%. That compares favorably to longtime rival Apple Inc. (NASDAQ:AAPL), which has gained a little more than 4%. Even mighty Amazon.com, Inc. (NASDAQ:AMZN), which competes in the lucrative cloud, can only muster about 6%.
It’s a remarkable turnaround for Microsoft stock. Just a few years ago, MSFT stock didn’t appear capable of fighting its way out of a paper bag. Similar to Sony Corp (ADR) (NYSE:SNE), Microsoft’s retail stores appeared like a cheap copy of the Apple store concept.
Now, there’s a legitimate reason to pay them a visit.
Still, there’s something to be said about moving too high, too fast. Johnson Research Group warned that MSFT stock entered overbought territory ahead of its earnings report. Traders may be “buying the news,” which might signal a nearer-term pullback after the quarterly financial disclosure.
Are the markets too enthusiastic about Microsoft stock, or is there truly more room to grow?
MSFT Stock Is Winning in the Cloud
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Unfortunately for the bears, Microsoft stock has too much going in its favor. InvestorPlace contributor Richard Saintvilus points out that the company recently announced layoffs to its sales force positions.
Though the cuts only impact a small percentage of Microsoft’s total headcount, it facilitates streamlining for the cloud. As Saintvilus puts it, MSFT “doesn’t want to play second fiddle to Amazon indefinitely.”
Nor will it, according to GameChangers editor Hilary Kramer. Microsoft has already demonstrated tremendous success with its commercial cloud data solutions platform, resulting in annual revenues of $15 billion. But the big boy is Azure, the cloud-computing powerhouse that allows businesses to host their software applications, and to scale their capacity according to demand. Cash flow for Azure is growing at an epic rate of 90% to 100% year-over-year.
Furthermore, Kramer is chiefly optimistic about Microsoft stock because Amazon lacks its leverage. She writes:
“As the upstart, AMZN has done extremely well rolling up the easy accounts that really only need to share storage space on the company’s vast server farms. This is the low end of the cloud, though, selling access to computing infrastructure as a utility. And while those easy pickings have helped grow Amazon Web Services (AWS) to roughly the size of the Microsoft cloud, 42% growth in that space isn’t even half of what Azure has been producing.”
Don’t Bet Against Microsoft’s “Traditional” Businesses!
With all the focus on the cloud, we forget that MSFT stock is primarily a consumer tech investment. The Microsoft Surface tablet generated plenty of buzz over the years. Just as importantly, it secured primetime TV partnerships with powerful organizations like the NFL.
Furthermore, Microsoft announced the XBox One X last month, and set for release in November. The company claims that its powerhouse video-game console is 40% more powerful than competitor offerings. Only time will tell if those stats are accurate. Nevertheless, the product announcement is a massive win for MSFT stock.
Unlike other consumer tech platforms, a part of video gaming still runs by the adage “bigger is better.” Obviously, smaller, portable devices don’t have the capacity required to produce the life-like graphics and frame rates that today’s gamers demand. Gaming is so massive that it was one of the few sectors that kept Sony afloat during its embattled years.
Given all the tailwinds that Microsoft is enjoying, it’s only the bravest person that will short it. Otherwise, I think MSFT stock has plenty of upside potential. Its cloud business is soaring, its traditional businesses are kicking butt, and management is dead serious about their turnaround strategy. If there’s such a thing as a no-brainer in tech, Microsoft would be it.
As of this writing, Josh Enomoto is long SNE.
