Investors receive little insight charting stock prices and deciphering patterns, but with the Microsoft Corporation (NASDAQ:MSFT) “double top” in February, Microsoft stock holders should take notice.
For those that don’t know, a double top is a price formation that could possibly signal the end of a bull market. It is essentially a rise and a drop followed by yet another rise and subsequent drop.
At around $64.20 a share, a dividend yielding just 2.43% and a price-earnings of 30, what justifies the valuation of Microsoft stock?
Investors love the cash that Microsoft generates every quarter. In Microsoft’s second quarter, the company reported phenomenal revenue growth from Azure and $7.4 billion from the productivity and business processes division.
The only sore spot for Microsoft stock was the personal computing unit. Although revenue of $11.8 billion is impressive, it dropped 5% from last year. LinkedIn added revenue of $228 million, but cost MSFT $100 million in net income.
Subscription Growth
Office 365 fueled Microsoft’s subscription revenue growth. CEO Satya Nadella said it will focus on growing the licensing level for programs like SharePoint with PowerApps and Flow. That way, recurring value grows, usage improves and customer renewals continue:
“First, even for the customers who are already on Office 365 at any given licensing level, we focus quite a bit on their increased usage and intensity. So for example, one of the comments I made in my remarks was, for example, SharePoint with PowerApps and Flow. That’s to us to the best way for us to keep having that recurring value.”
Profiting From LinkedIn
The negative earnings from LinkedIn may reverse, eventually. Microsoft sees the unit as a strategic asset in building a network of professionals. As revenue grows, the customer base grows. When the time is right, MSFT will have cloud products and productivity software it may sell to the bigger user base.
Log in to LinkedIn and you will notice the site received a complete redesign. It is confusing. Pages load slowly and users will not know how to navigate as easily as they did before.
No Smartphone, No Problem
Enthusiasm for Azure cloud services and Office 365 justifies MSFT’s high valuations, but Microsoft still has no real market share in smartphones. Its development of Office apps on devices may keep the company relevant in the mobile space. Having a firmer control on the hardware developments would be more ideal.
By pushing Windows Phone operating system, Microsoft is not winning over users. That will lead to a further drop in smartphone sales. Innovation in the hardware for Windows phones will slow as a result.
Eventually, the company will cede the market to Apple Inc.’s (NASDAQ:AAPL) iPhone and Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Android phones. Google, for its part, is fully embracing Android devices through the development of the Pixel device.
Bottom Line on Microsoft Stock
Nintendo Co.’s OTCMKTS:NTDOY) release of the Switch console on March 3 is notable for the Japanese company. The Wii U console resulted in Nintendo losing market share. Switch, however, is not expected to take much market share from Microsoft’s Xbox One console. Xbox Live had more than 55 million active users, up 15% from last year.
It added $1 billion in revenue for the quarter, up 17% from last year. At that phenomenal rate of growth as a function of revenue growth, Sony Corporation’s (NYSE:SNE) market share dominance with the PS4 is not that impressive.
Azure is one of the few bright spots of spectacular growth for Microsoft. Its other businesses, however, are running well. The 30 times P/E will shrink if earnings growth outpaces expectations and Microsoft stock’s double top is barely a concern. That said, chances are good MSFT’s stock will continue moving higher.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
