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Is Microsoft Stock Still Worth Buying?

Is the stock price a bit lofty, or does a new cloud-first direction make MSFT a good buy?

By Charles Sizemore, Principal of Sizemore Capital

http://bit.ly/21IVo1d

In a year in which the S&P 500 has ground sideways, stodgy, old Microsoft (MSFT) — the Big Tech company everyone used to love to hate – has quietly been hitting new 52-week highs and is up nearly 20% year to date.

Is Microsoft Stock Still Worth Buying? (MSFT)Sure, that’s nothing compared to Alphabet (GOOG, GOOGL), which is up by nearly half. But Microsoft stock is beating the pants off of Apple (AAPL), which is barely up 5% in 2015.

Softy is back, and CEO Satya Nadella is steering MSFT in the right direction with his “mobile first, cloud first” strategy. But with MSFT shares now trading for 37 times earnings, has the Microsoft stock price lost touch with reality? After all, this is a company whose iconic product — the Windows operating system — is tied to a declining PC market.

Let’s take a look.

Microsoft Stock by the Numbers

To start, while Microsoft stock’s current price-to-earnings ratio might look a little on the pricey side, that is partly due to the bath MSFT took in its fiscal fourth quarter. MSFT took a $7.5 billion writedown on its investment in Nokia, which depressed earnings for the quarter and for the entire year. Looking at next year’s expected earnings, Microsoft stock trades at a forward P/E ratio of 20. While that is not “cheap,” per se, it’s in line with the forward P/E of 18 for the S&P 500.

chart

Revenue growth has been disappointing over the past two quarters (looking at a rolling-twelve-month tally), but this is in part due to MSFT’s transition to a subscription-based model.

For example, Office users traditionally bought a licensed copy in a single one-time payment. But today, Office 365 users pay a low monthly subscription fee. The result is that current revenues appear lower even while the quality of revenues has improved, as a subscription-based model creates regular, recurring payments. MSFT estimates that this will ultimately bring in 80% more revenue per customer, though it will take time to fully work out.

MSFT’s decision to give Windows 10 away for free to existing Windows 7 and Windows 8 users has also taken its toll on revenue growth. While probably a smart move in the long run, as it helps to put the Windows 8 debacle in the past, it still takes a bite of out today’s revenues.

PC sales will also probably stage a modest recovery from their current depressed levels as companies replace aging machines.

But the bigger news for MSFT bulls is that, under Nadella, Microsoft continues to move beyond the Windows platform. Microsoft, along with Alphabet and Amazon (AMZN), is emerging as a leader in cloud services. MSFT’s cloud-based Azure platform saw its revenues jump 135% last quarter. Revenues from MSFT’s Intelligent Cloud division, at $5.9 billion last quarter, are quickly catching up to its Productivity and Business Processes division. This unit — which includes Microsoft Office — earned $6.3 billion last quarter.

Though Microsoft stock yields only 2.7% at current prices, it has become something of a favorite among dividend investors due to MSFT’s great track record of raising the dividend. In September, MSFT announced a 16% dividend hike, and the company has grown its dividend at a 19% annual clip over the past three years.

Given that MSFT has nearly $100 billion in cash and equivalents, I’d say odds are good that growth will continue.

Bottom Line for MSFT Stock

So, what’s the verdict? Is Microsoft stock, despite its run-up, still a buy?

Absolutely.

The risk in owning MSFT at this point is simply the risk of a broad market sell-off. If that is something that concerns you, consider putting on a stop loss.

But given that Microsoft’s reinvention is still in the early stages, I certainly wouldn’t be in any hurry to sell.

Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. As of this writing, he was long MSFT and AAPL.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/microsoft-stock-still-worth-buying/.

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