It seems that Microsoft Corporation (NASDAQ:MSFT) has somehow regained its youth. It’s as if the company has returned back to the roaring 1980s and 1990s, and MSFT stock prices continue to show it.
Consider that MSFT stock is up 36% for the year so far. In fact, the return is about 133% since 2013.
While this is certainly great, might the valuation be getting a bit bubbly? Well, the price-to-earnings multiple is at 31X. By comparison, Oracle Corporation (NYSE:ORCL) trades at 21X and International Business Machines Corp. (NYSE:IBM) is at a mere 12X.
What’s more, MSFT does have some risk factors. Perhaps the most glaring is that the company still has heavy reliance on the PC market, which is in a secular decline. MSFT must also have to deal with significant competition, especially in red-hot categories like cloud computing and Artificial Intelligence (AI).
So what to do? Actually, even with the issues, the bull case still looks intact. To see why, let’s take a look at three key factors:
Bullish Factor #1 for MSFT Stock: Cloud Power
Not long ago, there were worries that MSFT was poised for disruption. The company’s franchises, like Office, were based on legacy approaches. But companies like salesforce.com, inc. (NYSE:CRM) were trailblazing cloud-based strategies. These offered much lower costs, better user experiences and improved access to real-time data.
The good news is that when CEO Satya Nadella came on board in 2014, he wasted little time in transforming MSFT. He retooled the product line for the cloud, creating new offerings and struck a variety of acquisitions.
The strategy has proven to be a big-time winner. During the latest quarter, the commercial-cloud business, which includes Azure and Office 365, is on pace to hit $20 billion in revenues on an annual basis.
More important, the market opportunity is enormous. According to IDC, the cloud software category is forecasted to grow from $78.4 billion in 2016 to a staggering $151.6 billion by 2020. This comes to roughly an 18% compound annual growth rate.
Bullish Factor #2 for MSFT Stock: AI Power
Granted, there is quite a bit of hype with AI. But as seen with companies like NVIDIA Corporation (NASDAQ:NVDA), there are clear market opportunities. AI is no longer in the realm of science fiction.
But MSFT also should be top on the list for leaders in the market. After all, the company has one of the leading virtual assistants, Cortana. What’s more, MSFT has been creating its own chipsets, which are likely to be a part of many types of devices like the HoloLens platform (this allows for Augmented Reality experiences).
Then there is the BrainWave framework, which is based on field-programmable gate arrays (FPGAs). According to InvestorPlace.com’s James Brumley: “[BrainWave] speeds up processing of artificial intelligence algorithms by a factor of 50, or in some cases by 100. Such a technology allows for the creation of something that can be legitimately called a neural network.”
Bullish Factor #3 for MSFT Stock: Financials and the Dividend
When it comes to rock-solid balance sheets, MSFT is one of the world’s best. Note that the company is one of two companies that sports a AAA credit rating in the S&P 500.
Then again, MSFT has a long history of generating substantial free cash flows. In the latest quarter, they came to $8.7 billion, up about 7% on a year-over-year basis.
As a result, MSFT has more than enough resources to invest in R&D and engage in aggressive dealmaking. Oh, and yes, there is plenty of cash for dividends. Currently the yield is at 2% on the MSFT stock price, which is fairly attractive for mega tech operators.
Tom Taulli is 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.
