Microsoft Corporation (NASDAQ:MSFT) has again emerged as an important tech company. The company’s successes, especially with cloud computing, have returned MSFT stock to prominence. Double-digit growth has also returned. Unfortunately for growth investors, the market has long since noticed this re-emergence.
Because Wall Street sees this growth, the stock price increased by about 45% over the last year. Due to this rate of increase and its strong but declining profits, MSFT is due for a pause.
MSFT stock is old tech with new tech growth rates
In a previous article, I referred to Microsoft as “old tech poised to grow like new tech.” MSFT stock entered the Dow 30 in 1999 at the height of the 1990s-tech boom. For years after, it behaved like a growth stock.
Growth slowed when the advent of the tablet and smartphone meant fewer people needed the Windows operating system. At that point, it went into slow-growth mode reminiscent of the stereotypical Dow company.
Now that Microsoft succeeds in new business lines, it still should be thought of a Dow stock. However, it should be thought of like International Business Machines Corp. (NYSE:IBM) or arch rival Apple Inc. (NASDAQ:AAPL) and not like 3M Co (NYSE:MMM) or American Express Company (NYSE:AXP).
MSFT stock will enjoy periods of high growth until technology evolves away from their products. Then the company will revert to slow growth mode until it finds the right product lines and adapts to the new tech climate. IBM has employed this strategy for decades. Now, MSFT follows this path.
To be sure, this strategy has had its failures. Its Windows Phone failed to take off, and even Bill Gates was forced to switch to an Android phone.
Also, in the smart speaker market, the Microsoft Cortana did not review as well as Google Home from Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) or the Echo from Amazon.com, Inc. (NASDAQ:AMZN) at this year’s CES.
Still, Microsoft remains one of the most cash-rich companies in business. It can afford product failures in a quest to reduce dependence on the PC market. Throw enough darts, and eventually, one will score a bullseye.
Cloud computing has emerged as MSFT’s growth driver
The company hit a bullseye with Microsoft Azure, its cloud computing platform. Azure revenue has been growing at 90% per year and MSFT now owns 31% of the cloud market. This growth rate alone has brought revenue growth for Microsoft as a whole above 10%.
Moreover, analysts forecast net profits for fiscal 2018 to grow by 25% and 12% for fiscal 2019. Also, like in the 80s and 90s, Microsoft is again winning over Apple. Analysts forecast only single-digit increases for Apple in the same time periods.
However, valuations indicate current buyers might have arrived late to the game. The Microsoft stock price has grown by about 45% over the last year. At its current rate of profit, that places the stock at over 31 times earnings. Since Azure will unlikely not maintain a 90% growth rate forever, that rate of increase will slow.
Due to that slowing, earnings per share (EPS) growth, now may not be the time to buy MSFT stock. Still, investors should keep MSFT on their watch lists. If the equity experiences a significant correction, investors should look to buy at that time.
Final thoughts on MSFT stock
Given that stock price growth has exceeded profit growth, now may not be the time to purchase MSFT. The company’s move away from PCs to other platforms has turned the company from a stodgy Dow 30 stock to one of the most dynamic companies in the index.
With its successes, particularly in cloud computing, Microsoft has returned to double-digit revenue and earnings growth.
However, investors noticed and Microsoft stock has risen by 45% in the last 12 months alone. Now, with a 31 PE and a slowing growth rate, the stock price appears to have moved ahead of growth.
Considering both valuation and growth, buyers should watch MSFT stock, but wait on a correction before buying.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.