Microsoft Corporation (MSFT) Is Becoming AT&T

It's time to take a different approach to Microsoft stock

Microsoft Corporation (NASDAQ:MSFT) is seen as a software company; it invests in programmers, and it sells programs. But maybe it’s time you started looking at it as something different. Maybe you should look at MSFT stock as a utility, one that invests in infrastructure and sells services.

Today’s Microsoft is a cloud-first company, seeking monthly subscription revenue for Windows, Office and other products, and delivering instant updates via Azure.

MSFT is a single global conglomerate, whose policies are no longer autonomous, but subject to global judicial review. Today’s Microsoft makes decisions on things like OneDrive storage that can be implemented almost instantly, causing havoc among users and, often, enormous blowback.

With that said, investors often compare MSFT with Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), but are these the right companies to compare it with?

How to Approach MSFT Stock

After a half-decade of heavy investment, the big cloud players, which include Microsoft, Alphabet, Amazon.com, Inc. (NASDAQ:AMZN), Facebook Inc (NASDAQ:FB) and International Business Machines Corp. (NYSE:IBM) now have tens of billions of dollars invested in global networks of cloud data centers. Apple is now investing more than any of them, fueled by device profits and seeking to increase service revenues.

They have funded these investments, mainly, with billions in cash flow from existing operations — search in the case of Google, commerce in the case of Amazon, social in the case of Facebook, devices in the case of Apple and software, of course, in the case of Microsoft.

Maintaining these cash flows is vital to maintaining capital expenditures. Microsoft is going to need continuing revenue from Windows, enterprise applications, cloud rental and its Windows operating system to maintain its position.

Microsoft is becoming a software utility, which is why investors should start giving MSFT stock a utility’s valuation.

So … how does it do as a utility? Well, AT&T Inc. (NYSE:T) carries a price-to-earnings multiple of about 19, while delivering a yield of 4.5% at current prices. MSFT stock offers a yield of 2.6%, but the price-to-earnings ratios are relatively comparable. Over the last year, Microsoft increased its revenues about 7%, AT&T about 10%.

Think of it: AT&T sells services. Microsoft sells services. AT&T’s earnings are based on maximizing profits from enormous capital investment, expected to be $12 billion this year. Microsoft’s earnings will also be based, from here on out, on earning a return on capital investment, which came in at about $6 billion over the last year.

In other words, clouds are the utilities of the twenty-first century, which means Microsoft stock should be seen similarly to AT&T.

Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long MSFT, GOOGL, AAPL and AMZN.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/07/msft-stock-microsoft-becoming-att/.

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