After years of treading water, Microsoft Corporation (NASDAQ:MSFT) is getting its groove back. MSFT stock has recently hit an all-time high and the market cap is a hefty $467 billion. The last time Microsoft stock hit these levels was back in the heyday of the dot-com era.
This comeback story is undoubtedly the result of the smart strategic decisions from CEO Satya Nadella. During the last couple years, he has wasted little time in making tough calls, such as jettisoning its disastrous Nokia Corp (ADR) (NYSE:NOK) acquisition. At the same time, he has invested heavily in cloud computing as well as other next-generation technologies like artificial intelligence.
It certainly helps that Nadella has set forth a clear vision for Microsoft. When he took the helm, he said: “The opportunity ahead for Microsoft is vast, but to seize it, we must focus clearly, move faster and continue to transform. A big part of my job is to accelerate our ability to bring innovative products to our customers more quickly.”
During his tenure, MSFT stock has logged an impressive 55% return.
But is there still opportunity for Microsoft stock investors? Or should there be some caution? For the most part, it looks like there could be continued momentum for MSFT stock; the following are three key reasons to consider.
MSFT Stock Reason No. 1: Cloud Power
Cloud computing is a megatrend that is still in the early phases. According to research from Morgan Stanley, the global spending in this category is expected to jump from $70 billion last year to $141 billion by 2019.
In other words, there is lots of room for multiple players. And the good news is that Nadella’s early moves into the space will be a critical edge as laggards like Oracle Corporation (NYSE:ORCL) and International Business Machines Corp. (NYSE:IBM) struggle to catch up.
Microsoft stock has some inherent advantages as well, such as a trusted brand, a global infrastructure and a portfolio of mission-critical technologies. Even the Windows franchise, which is often considered an afterthought, has been important. Keep in mind that the service is essentially a cloud service for over 1 billion PCs and devices.
There is little doubt that the cloud is becoming a major driver for Microsoft’s financials. The company is now the No. 2 player with 11% of the market, according to Synergy Research Group. Of course, the leader is Amazon.com, Inc. (NASDAQ:AMZN), which has about 31%.
But MSFT stock is not only demonstrating it can gin up lots of growth — with Azure up 116% in the latest quarter — but also to bolster the profitability of the business. The operating margins are at a juicy 32%.
The $26.2 billion acquisition of LinkedIn Corp (NYSE:LNKD) should also be a nice cloud booster for Microsoft stock in the long-term. MSFT will gain the valuable user base of 467 million. But LNKD has also been investing heavily in its own cloud architecture (allowing for improved speed and security), which could ultimately be a threat to operators like Cisco Systems, Inc. (NASDAQ:CSCO) and Juniper Networks, Inc. (NYSE:JNPR).
MSFT Stock Reason No. 2: Benefits From Next-Gen Technologies
When Bill Gates was the CEO, he was able to masterfully deal with the tumultuous changes in the technology world and fight tough competitors. Perhaps the best example of this was how he was able to adapt to the explosive rise of the internet.
But when he stepped down as CEO in 2000, MSFT really lost its innovative core DNA. The result was that the company missed huge opportunities such as mobile. Instead, rivals like Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) capitalized on the opportunities. When the iPhone came out, MSFT CEO Steve Ballmer boasted: “There’s no chance that the iPhone is going to get any significant market share. No chance.”
Nadella wants to ensure this failure does not happen again. To this end, he has shown that he will make major investments in growth areas, whether with internal development or transformative acquisitions.
But it looks like Nadella is willing to take risks as well. For example, he plans to introduce next-generation voice recognition and machine learning in the new version of Office 365. There is also Cortana, which is an intelligent personal assistant that leverages AI and has roughly 141 million monthly active users.
MSFT also has the advantage of the Xbox platform, which will likely be critical with moves into VR — such as Microsoft’s HoloLens technology. According to International Data Corp, the market is expected to hit a whopping $162 billion by 2020, up from only $5.2 billion in 2016. This represents a sizzling 181% compound annual growth rate.
MSFT Stock Reason No. 3: Fortress Financials
Microsoft is a major cash generator. In the latest quarter, GAAP operating income came to $5.2 billion on sales of $20.5 billion. Overall, there is a hefty $113 billion.
So yes, there is lots of firepower for investments and acquisitions. MSFT stock also has room for continued dividend increases. Currently, it sports a yield of about 2.6%.
Now the valuation for Microsoft stock is not necessarily cheap. The forward price-to-earnings multiple on MSFT stock is about 18.5. By comparison, ORCL is at 13 and SAP SE (ADR) (NYSE:SAP) is at 19. However, Microsoft stock has some major advantages, especially with its foothold in the cloud market, so having a bit of premium on the valuation is definitely reasonable.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities, and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
