Microsoft Corporation (MSFT) has been a frustrating stock for many investors, going pretty much nowhere from 2001 to 2013. But thanks to a series of events in recent years, including the departure of longtime CEO Steve Ballmer and the rise of cloud computing leader Satya Nadella to take his place, MSFT stock has managed to put up some impressive numbers in the last year or two.
Yes, shares have softened up lately, with MSFT stock off about 10% since its May highs. But in its most recent earnings report, Microsoft actually beat Wall Street estimates by a wide margin.
On the whole, things are looking up. Microsoft has plenty of work to do, recently winding down its snakebitten acquisition of Nokia (NOK) devices and services and moving steadily toward a new business model that isn’t so reliant on PC sales to drive software licenses.
And one big element of this strategy is Windows 10 — which may be just the home run MSFT stock needs to prove that it is indeed back on top.
Everything Riding on Microsoft Windows 10
After the disaster that was Windows 8, Microsoft decided to leap right over the number nine and get to a nice, round figure of 10 for its newest Windows platform. And judging by early reception, the company has a big potential hit on its hand.
According to reports, Windows 10 has been downloaded on 75 million PCs — an amazing number, even when you consider its July 29 launch made the new version free to Windows 7 and 8 customers.
By contrast, Windows 8 had just over half that number of licenses sold after one month.
Now, the free downloads aren’t going to drive revenue in the short term — and, if reports are true, they won’t even drive revenue later. There was initially some confusion over whether the Windows 10 upgrades were really “free” or simply a ploy to hook folks on the software, then charge them after a year or so for the service. If that’s the case, MSFT just lost out on a whole lot of potential sales.
However, the move is shrewd because it is an effort to spin up the new OS in a way that encourages others to eventually upgrade — particularly the 14% or so of Windows users who are still stuck on antiquated versions of the MSFT software like XP or Vista.
Getting a critical mass of users is crucial for Microsoft going forward, both for the medium-term performance driven by Windows 10 sales and for the long-term challenges of staying dominant as a software company at the same time mobile technology continues to sap the need for PCs and laptops.
MSFT Stock Looks Like a Bargain as a Result
For investors, there are reasons to be encouraged by MSFT stock beyond Windows 10.
A 2.8% yield is still significantly higher than 10-year Treasury notes, and a roughly 40% payout ratio makes the Microsoft dividend not just sustainable but ripe for increases.
After decent earnings, MSFT stock now has a forward price-to-earnings ratio of about 14.3 — much more reasonable than other nosebleed valuations in tech. And that’s not even when you take into account some $108 billion in cash and investments on the books.
Look, Microsoft is not the sexiest company in tech and has had its troubles in the past, but as this market gets rocky in late 2015, it’s important to look for companies with a wide moat and staying power.
The PC isn’t king like it once was, but it is naive to think that laptops and Windows will be going away anytime soon.
And if Windows 10 continues its momentum, MSFT stock could see a second act that may put some mobile companies to shame.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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