Shares in Microsoft Corporation (MSFT) had a terrific year, and the drivers of that performance promise to deliver another year of market-beating gains for MSFT stock in 2016.
MSFT stock is up nearly 20% for the year-to-date. Note that these results come at a time when the tech sector is up just 5% — as measured by the Technology Sector SPDR (XLK) — and the S&P 500 is back to a year-to-date loss.
The reason behind the market-crushing returns is that for the first time in perhaps decades, MSFT finds itself succeeding in the next big thing — cloud computing.
Indeed, cloud services are so popular, they’re the single biggest catalyst for the sector. Just look at Amazon (AMZN), where its cloud business generated more earnings than it knew what to do with last quarter (resulting in a rare profit.)
In MSFT’s case, the cloud is more than making up all the company’s wrongs — of which there are plenty — and has market sentiment on the name soaring. Investors are now willing to pay nearly 18 times forward earnings for MSFT, up from a five-year average of less than 13.
Less than 13? What is this, a bank stock?
To be fair to the banks, Microsoft stock without the cloud services really is a dud. Sales of smartphones and copies of Windows declined in the most recent quarter.
More importantly, although the effects of the launch of Windows 10 won’t become clear until MSFT reports current-quarter results, there’s no question that the all-important PC industry is in decline. Indeed, market researcher IDC said global PC shipments fell nearly 11% in the third quarter.
MSFT Stock Is Floating on the Cloud
And none of this matter to the street because the company’s mission to rely less on revenue associated with PCs is working. MSFT’s cloud business rose 8% to $5.9 billion in the most recent quarter.
The cloud helped MSFT beat Wall Street estimates in the most recent quarter, but a slower-than-expected decline in its biggest segment bodes well for 2016, as well.
Revenue from Windows, Xbox and the Surface tablet, among other offerings, fell to $9.4 billion year-over-year when the Street expected it to hit $8.8 billion.
If Windows 10 goes as planned, the drag from the personal computing business will become less pronounced and — together with cloud services — should deliver yet more earnings beats next year.
As Warren Buffet likes to say, most turnaround don’t turn. Happily for anyone holding Microsoft stock, this one is.
MSFT is expected to deliver earnings-per-share growth of 13.6% in 2016 on a 6.6% gain in revenue. Those are pretty heady numbers for an old-line mega-cap tech firm doing more than $90 billion in annual sales.
The bottom line is that MSFT has turned into a growth story that will accelerate in 2016. The market is catching on to this and should propel Microsoft’s valuation — and MSFT stock — to more market-beating gains.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
