If the volatility in the stock market ends up pulling stocks lower, investors may have the opportunity to buy Microsoft Corporation (NASDAQ:MSFT) at a discount.
The company has a competitive advantage in all of the markets it operates in. It has a razor-sharp focus in the high-growth markets, especially the cloud business. Ever since it stopped selling smartphones because it knew it was too late to catch up to iOS and Android, Microsoft’s focus on mobile software continues to pay off.
It started with the company making the Windows 10 operating system as secure as possible. By pushing updates as early as possible, the always up-to-date O/S enables Microsoft to protect its customers from threats.
That mentality extends to its cloud platform. In its second quarter which it reported on Jan. 31, Microsoft owes part of its solid performance in its 365 product to the secure environment.
Microsoft counts BP plc (ADR) (NYSE:BP), PayPal Holdings Inc (NASDAQ:PYPL) and Goodyear Tire & Rubber Co (NASDAQ:GT) as some of its customers. Mastercard Inc (NYSE:MA) staff uses Microsoft’s SharePoint, Yammer and Teams to facilitate its collaborative work tasks.
As people gain awareness of Microsoft 365’s ease of use, more companies will not only replace their Office 2016 software with 365, but will buy Microsoft’s other services. And for good reason. Excel has an Insights feature that uses machine learning to detect and highlight patterns.
Remember the boring Microsoft Word software? On 365, Word has a Translator for 60 languages. Since Cortana is integrated into 365, users may dictate their emails or have them read.
Last quarter, Office 365 commercial revenue jumped 41%. Commercial seats for the cloud software grew 30%.
MSFT Not Missing Out
Remember when Microsoft exited the smartphone market by winding down Windows Phone? It did not entirely give up on the hardware market. The company launched the Surface LTE tablet last quarter. On the PC front, it is even catching up to the superior standby capabilities of Apple Inc. (NASDAQ:AAPL).
The next-generation PCs are always connected and have as much as 20 days of standby power. Before that, Microsoft-powered computers hardly lasted for very long when it was on standby. Apple ruled in this regard because its laptops and mobile devices could last for a long time before all the battery power was drained.
Microsoft’s moat in office productivity on the cloud contributed positively to revenue. In Q2, revenue rose an impressive 12%, to $28.9 billion. Profitability rose as gross margin increased 12%.
Embracing Transformation at Heart of Growth
Microsoft’s incredible growth rates may be attributable to the once-in-a-lifetime technical transition and digital transformation occurring today, as management said on the conference call.
Strategic acquisitions, including LinkedIn, positioned Microsoft to capture as many commercial customers as it could, from database storage, Azure cloud, operating systems and all the way to devices through its mobile software. In that time and in the foreseeable future, management is returning the excess cash flow back to shareholders, through buybacks and dividends.
Valuation of Microsoft Stock
Microsoft stock is not cheap at this time, but it still has upside. Per finbox.io, 33 Wall Street analysts have an average price target of $104. This is higher than the $92 fair value a handful of users believe MSFT stock is worth.
Still, a 5-Year DCF EBITDA Exit model that assumes revenue growing around 5% annually would imply Microsoft stock has a fair value of around $104 (same price target as Wall Street analysts).
Disclosure: Author owns shares of BP.