Has Microsoft Corporation (NASDAQ:MSFT) gone back in time? It feels like the glorious 1990s again, when the company could do no wrong, and MSFT stock was a frisky young tech play. Microsoft wasn’t just a big name — it was dominant.
Obviously, the company is much different today, what with Bill Gates no longer at the helm and a score of other tech companies trying to encroach on its turf. But current CEO Satya Nadella has been the right person to guide the company through wrenching changes, and Wall Street has been thrilled.
How thrilled? Microsoft stock has roughly doubled since 2014.
The pressing question of the day is: With Microsoft’s fiscal fourth-quarter earnings in the crosshairs tonight after the bell, have investors become overeager?
Microsoft Earnings Preview
Wall Street analysts are looking for a 7% increase on the top line to $24.46 billion, filtering down to a 3% improvement on the bottom line to 71 cents per share.
The main focus for investors will be the cloud, and on that front, there are few signs of a slowdown. Wall Street expects that the Intelligent Cloud business will report a year-over-year increase in sales to 9%, with the Productivity and Business category producing growth of about 20% (this includes Office 365, Dynamics and LinkedIn).
No surprise there. Microsoft has an array of advantages, including pre-existing global infrastructure, a massive customer base and millions of developers. Over the years, MSFT has retooled its software to the cloud, with a high degree of success. Take Office 365 Commercial, which now boasts more than 100 million monthly active users as the number of seats jumped by 35% during the latest quarter. Some of the recent customer sign-ups includeH & R Block Inc (NYSE:HRB) and Johnson & Johnson (NYSE:JNJ).
At the same time, Microsoft has been productive with new offerings. There’s Microsoft Teams, which is a chat app for the workplace. Then there is the LinkedIn, which has more than 500 million professionals on the network.
The latter business could prove to be a catalyst for Microsoft’s customer relationship management business — a sector currently dominated by salesforce.com, inc. (NYSE:CRM).
Microsoft and Azure
When it comes to the cloud, the main driver for MSFT stock is the Azure platform. This core infrastructure — similar to Amazon.com, Inc.’s (NASDAQ:AMZN) AWS system –allows other companies to set up their own apps.
The business has been red-hot, with sales skyrocketing 93% year-over-year during the most recent quarter. A key to the success has been Microsoft’s willingness to not lock customers in to its own software tools and services.
What’s more, Microsoft has been pushing innovation, such as the recent launch of Azure Stack, which allows customers to build their own private cloud systems. This is particularly attractive for organizations that are highly regulated and want to maintain strict control over their data.
According to InvestorPlace.com’ James Brumley:
“To the average investor that might not mean a thing, and to the average owner of MSFT stock, it may not mean a whole lot more. This is actually a pretty big deal though, in that it opens the door to a whole new could market that has been previously unapproachable.”
Interestingly enough, MSFT is pursuing an attractive business model as well — that is, customers can elect to pay on a per-usage basis. Granted, this means forgoing hefty upfront fees. But then again, the revenue stream should be more predictable and customers will pay for the value received.
It’s a long-term approach to building a sustainable business.
Bottom Line on MSFT Stock
It’s really hard to argue against Microsoft’s business strategy. If I had to pick nits, it would be the valuation on Microsoft shares, which comes to 22 times forward earnings estimates. By comparison, Oracle Corporation (NYSE:ORCL) trades at 16x and SAP SE (ADR) (NYSE:SAP) sports a multiple of 20x.
But isn’t a premium reasonable?
Microsoft is a dominant player in a category that, according to IDC, is expected to enjoy a 25% boost in spending to $128 billion this year alone, and hit a whopping $266 billion by 2021.
Microsoft is ideally positioned to claim an outsize portion of the opportunity, and to me, that makes MSFT stock worth the upcharge.
Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.