Microsoft Corporation (NASDAQ:MSFT), much like International Business Machines Corp. (NYSE:IBM) before it, has proven that it can redefine itself with the times. The company used to be defined by its Windows operating system and Office program, until competition from Apple Inc. (NASDAQ:AAPL) made its stronghold in these areas less relevant. But despite this, MSFT stock is still appealing.
Rather than be defeated by Apple, Microsoft responded with new product lines that appear successful. As the company rises again in prominence, investors must make a decision on how to define the stock.
Should they value MSFT stock as a mature, slow-growth company or as an innovative new-tech company with strong growth prospects?
A New Way to View MSFT Stock?
Microsoft once dominated the technology industry. It maintained dominance from the advent of the IBM PC in the 1980s up until the time tablets and smartphones became widely adopted in the early 2010s. The Windows operating system and its Microsoft Office productivity software insured profits and growth in this time, but all of that quickly changed with the rising popularity of the iPhone and other Apple products.
Yet, even in the face of a narrowing moat, Microsoft stock maintains its financial stability.
MSFT remained a debt-free company until 2009. Today, the company holds a combined short and long-term debt load of $86 billion. A credit rating of AAA backs this debt. Microsoft and Johnson & Johnson (NYSE:JNJ) are the only large corporations to currently maintain the AAA rating.
It’s Microsoft’s cash position that makes the debt manageable. As of the end of fiscal 2017, the company reported a cash position of almost $133 billion. Only Apple maintains a larger cash position. The available cash allows Microsoft to buy new businesses, even as older business lines decline. This is precisely the strategy MSFT CEO Satya Nadella employed in purchasing LinkedIn. for about $26 billion in 2016.
New Products to Help Boost Microsoft Stock
The cash position funded its rise in cloud computing as well. Since its release in 2010, Microsoft Azure has produced strong growth and a substantial market share in the cloud computing space. In 2017, MSFT achieved 93% growth in its cloud infrastructure business. Azure still lags behind Amazon.com, Inc. (NASDAQ:AMZN) and their Amazon Web Service (AWS); however, AWS grew only at 43% for the same period.
Among its other acquisitions is a move into virtual reality (VR), which places Microsoft in direct competition with Facebook Inc (NASDAQ:FB). To help with support its VR aspirations, MSFT has partnered with video game developer and digital distributor Valve. The partnership will help the company produce VR headsets for Windows 10, available as early as this month.
Additionally, Microsoft is making a push into artificial intelligence (AI). Not only has MSFT made acquisitions in AI, but it plans to launch Project Brainwave. Among its functions will be understanding sentiment and key phrases. Microsoft is also moving into quantum computing, which computing allows the 1s and 0s that power all computer languages to co-exist in the same space. This technology will allow computers to solve problems that today’s systems cannot handle.
MSFT’s Growth Trajectory Has Returned
Financials reflect optimism about Microsoft’s next generation of products, albeit with hiccups that come with its transition. Both revenue and net income have an average five-year growth rate of just above 4%. Meanwhile, net income was cut in half in 2015, but net income growth returned in 2017. Analysts predict a 10+% growth rate to return after 2017.
MSFT stock also brings investors a steadily increasing dividend. The dividend now stands at 42 cents per share — up from 39 cents in the previous quarter. The dividend yield stands at approximately 2.25%, or a few basis points shy of the yield on the 10-year U.S. Treasury bond.
With product innovations and financial strength, Microsoft stock offers benefits to both growth-oriented and conservative investors.
Microsoft Azure and other products appear poised to continue the company growth rate and bolster the MSFT stock price, while conservative investors receive a dividend yield comparable to a 10-year Treasury, along with the stock growth potential.
As of this writing, Will Healy did not hold a position in any of the aforementioned securities.
