Microsoft Corporation (MSFT) Stock Still a Strong Pick

Everything is going right for Microsoft Corporation (NASDAQ:MSFT). Even though the company missed revenue expectations by a paltry $60 million against $23.56 billion, the company has clear growth ahead. Even LinkedIn added nearly a billion in revenue for Microsoft.

MSFT Stock: Microsoft Corporation (MSFT) Stock Still a Strong Pick

Looking ahead, the Services unit will help lift growth.

Services Key to Growth

Microsoft’s services are exposing the company to the highest growing areas in technology. On its conference call, Microsoft cited Maersk, a transport firm that operates in 130 countries. The company uses intelligent services in Azure deliver real-time insight for data visualization, advanced analytics and meaningful insights for its carrier customers. In cognitive services, MSFT is developing face recognition and computer vision.

Cloud services continue to grow rapidly. Cloud revenue grew 52%, while gross margin rose to 51%. Dynamics, Azure and Office 365 are Microsoft’s key products that continue to benefit from strong demand. It is seeing rapid adoption for Office 365 E3. Investors should expect ASP (average selling price) for the business productivity product growing. Enterprise customers recognize the value. Office 365 E5 gives businesses everything they will need and will lift ASP.

In the third quarter, Microsoft crossed over 100 million monthly active users of Office 365 Commercial. Revenue grew 45% year-over-year.

Developments in IoT, Competition With Salesforce

Just as BlackBerry Ltd (NASDAQ:BBRY) is embracing the Internet of Things but primarily in secure communications, so too is Microsoft through IoT Central. This SaaS offers end-to-end solutions, from devices to networks to software. Microsoft extends its services further in IoT and allows customers to use managed services.

While Microsoft admits IoT security is lacking, it is partnering with LM Ericsson (NASDAQ:ERIC) instead of with BlackBerry to offer cellular IoT services.

Microsoft Dynamics has potential growth. The product competes with Salesforce.com, Inc. (NYSE:CRM), the leader in the CRM (customer relationship management) market. In its Q1, Salesforce.com reported revenue growing almost 25% to $2.39 billion. Operating cash flow grew 17% to $1.23 billion. Revenue from MSFT’s Dynamics 365 grew 82% in the quarter. While the Dynamics business grew 10%, Dynamics 365’s billings grew in the double digits.

Looking ahead, MSFT is transitioning Dynamics from on-premise to a modular SaaS service. But the big install base for on-premise will limit profitability in the near term. Adobe Systems Incorporated (NASDAQ:ADBE) successfully transitioned customers towards the cloud. When Microsoft does so with all its customers, it, too will benefit from the higher gross margins.

Microsoft Windows Refresh

Microsoft is not forgetting about the mature PC market. Windows 10 Fall Creators Update will include a refresh to the user-interface and to Cortana, the digital assistant. Even though digital assistants are integral for smartphones made by Apple Inc. (NASDAQ:AAPL) and Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Android, for Microsoft its primary platform is on the desktop. But Cortana will support Microsoft applications running on either platform. Users may, for example, work on a document created on a PC, then continue editing it on an iPhone.

By ensuring its products have similar feature sets to its competitors, Microsoft should sustain the strong user activity on its products.

Takeaway

Microsoft has strong growth ahead. With little debt, strong earnings growth of 42% year-over-year and a forward P/E of 21 times, this stock should appeal to technology investors.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/microsoft-corporation-msft-stock-dip/.

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