When growing up, children are often told to keep their head out of the clouds and not live in the past. Microsoft Corporation (NASDAQ:MSFT) has staged a comeback by breaking both of these rules. After suffering for years under a lagging PC market, Microsoft stock has found success in the cloud computing market.
Moreover, the PC business of the past has also seen a resurgence. Given this rebound in both old and new tech, buying Microsoft stock has become a question of when to buy instead of whether to buy.
The Microsoft Stock Comeback
The leadership of Satya Nadella has put Microsoft back on the map. After years of failure at finding its place in the current tech market, the company found success by putting its head, or at least its future, in the cloud.
Its cloud product, Microsoft Azure, has achieved outsized growth levels despite competing with AWS from Amazon.com, Inc. (NASDAQ:AMZN).
Azure’s expansion across the world continues. The company just announced they would build data centers in both Switzerland and the Middle East. The move in Switzerland comes after it opened data centers in France, Germany, the UK, and Ireland.
The Middle Eastern data centers will open in both Abu Dhabi and Dubai. It also operates data centers in places such as India, China, Australia, and Brazil. With data centers planned for South Africa, they will soon be available on six continents.
These more localized data facilities offer peace of mind that the data is not being stored across the world. It also gives MSFT the flexibility to comply with the data storage laws and regulations of various localities.
Microsoft Stock and PCs
In addition to the cloud presence, the company’s core business, PCs, have staged a comeback. PC sales have lagged for years as consumers expressed a preference for lower-cost tablets and smartphones to surf the internet or pay bills.
However, consumers have found that tablets and smartphones remain less than ideal for work-related purposes. HP Inc (NYSE:HPQ) reported a 10.5% increase in the number of notebook PC devices.
Since MacBooks made by Apple Inc (NASDAQ:AAPL) only account for about 7.4% of the PC market, this bodes well for Windows. And even then, many Mac users continue to prefer Office. Hence, this translates directly into increased sales for both Windows 10 and Office, which has thrived offering Office subscriptions.
Unlike some companies, Microsoft still sells permanent licenses. However, subscriptions have become the preferred method for acquiring Office software.
Good News Priced into Microsoft Stock
Clearly, the good times have returned to Microsoft. The only criticism I can lodge against MSFT stock is the fact that its good fortunes are priced into the equity. Also, Microsoft fits the definition of a mature company.
It boasts the fourth largest market cap in the world. It has become heavily tied to both old and new tech, and a rare AAA credit rating.
To be sure, multiples have grown to historically high levels. Microsoft stock traded for years with a multiple in the low teens as its core PC business fell out of favor. With its PC business growing again and its successes in new tech, that multiple has risen to average levels.
With the MSFT stock price today hovering at the mid-$90s per share level, Microsoft trades at a price-to-earnings (PE) ratio of about 29, and 24 on a forward basis. It also pays a dividend yield of 1.72%. The S&P 500 average PE stands at 25.82 as of now. Its average dividend yield has fallen to 1.77%.
In a previous article, I called Microsoft stock a “don’t buy,” implying investors should wait for a pullback. I’m going to soften my view for conservative investors.
From the numbers above, one could assume Microsoft is marginally undervalued, but the numbers imply that the stock trades more or less at fair value. I wouldn’t recommend purchasing the stock at this level, nor would I discourage it.
For those retiring and wanting a safe place to store large sums of wealth, Microsoft stock compares well to the safest of choices long term. However, those wanting either a bargain or outsized equity gains should look elsewhere.
The bottom line on Microsoft
Microsoft has staged a resurgence by breaking the rules. In cloud computing, Microsoft continues to gain market share as Azure gains popularity across the world. Also, PCs have come back in favor as consumers find smartphones and tablets less than ideal for work purposes.
Unfortunately for value investors, investors have discovered this, and the stock trades at its highest multiples in years. Although the chances of outsized gains appear to have past, few equities can beat Microsoft stock in terms of safety.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
