After a big run in the tech sector, investors are starting to take profits, as seen with the drops in operators like Netflix, Inc. (NASDAQ:NFLX) and NVIDIA Corporation (NASDAQ:NVDA). This is no surprise, but the situation could present some opportunities to get better valuations.
Consider Microsoft Corporation (NASDAQ:MSFT), for example. During the past week, MSFT stock has dropped from $85 a share to $81 a share. Yet, even thought MSFT stock did not have a huge move on the upside this year, the total return has come to 30%.
This low-volatility pattern is probably a good thing, especially if there is a rotation in tech. MSFT stock may not be as vulnerable on the downside. As InvestorPlace.com‘s Chris Fraley has noted, the company “remains one of the steadiest performers in the investment world.”
A key is that the fortunes of MSFT stock are tied to the cloud business. If anything, this category is likely to continue to see robust growth. The cloud provides clear-cut advantages like improved analytics, lower implementation/maintenance costs and centralized data. These are the kinds of things that are strategic priorities for companies — which should mean insulation for MSFT stock against budget tightening.
According to IDC, the cloud market for software is forecast to grow from $78.4 billion in 2016 to a staggering $151.6 billion by 2020 — translating into an 18% compound annual growth rate. This is certainly big enough to move the needle for MSFT stock.
Microsoft has many inherent strengths for cloud computing. The company has a trusted brand, a large number of customers and a global IT infrastructure.
But, of course, MSFT has gone well beyond all this. For example, it has retooled its Office products, Dynamics CRM and other critical applications. Microsoft has also been smart with its acquisitions, such as its deal for LinkedIn. This has meant that the company now controls a professional network of over 500 million members.
Interestingly enough, MSFT’s legacy technologies have turned out to be critical. They have allowed for so-called hybrid environments, which provide customers with the option of on-premise solutions. This approach has been attractive for companies that are in heavily regulated industries.
And, finally, Microsoft has been aggressive with its partnerships. One of the latest is with SAP SE (ADR)(NYSE:SAP), which is one of the world’s largest providers of ERP applications. The company should be a nice generator of demand for MSFT cloud apps and infrastructure solutions.
Microsoft’s investments in the cloud have definitely been wise. During the latest quarter, the Azure platform posted revenues of 90% and Office 365 was up 42%. On an annualized basis, the run-rate for the overall cloud business is roughly $20 billion.
It’s true that MSFT is more than just a cloud company. And, unfortunately, many of these businesses are tied to the PC industry, which is in a secular decline. Yet, the company has still been able to manage through this. In the latest quarter, Windows OEM revenues increased by 4% and the top-line for the Surface line was up about 12%.
So, all in all, Microsoft has been able to crank out growth across most of its business, with total revenues up 12% to $24.5 billion during the most recent quarter. There was also an increase in net income of 16%, to $6.6 billion.
Even though Wall Street has been discounting the cloud story, I still think there is further to go. This is a truly major transformation in technology. And the good news for MSFT stock is that the company is likely to be one of the long-term winners as a result.
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.