Financial media outlets love to cover big tech names. But, one big tech name that often gets left out of the mainstream conversation is Microsoft (NASDAQ:MSFT). That doesn’t mean, however, that Microsoft stock should be left out of your portfolio.
Quite the opposite, actually. Despite not being the focus of the financial news, MSFT has been a big winner over the past several years. This dynamic of relatively low coverage and big gains will continue. Microsoft finds itself in a winning sector, has strong company-specific drivers, the stock sports a reasonable valuation, and the technicals are healthy.
In other words, there is a lot to like about Microsoft and very little not to like. That is a winning recipe for any stock, especially one with a track record as strong as Microsoft.
Big Tech Remains Strong
The first reason investors should stick with Microsoft is because it is part of the big tech group that has led the market higher over the past several years. Quite simply, so long as this big tech group remains largely strong, MSFT should remain largely strong, too.
Right now, the outlook for big tech to keep rallying is quite favorable. Facebook (NASDAQ:FB) has been weak, but the stock has found support around $160 and looks ready to bounce if next quarter’s numbers beat depressed estimates (which is likely).
Alphabet (NASDAQ:GOOG) remains the backbone of the internet. Apple (NASDAQ:AAPL) continues to turn into a software giant. Nvidia (NASDAQ:NVDA) continues to lead the AI revolution. And, Microsoft continues to gain share in the all-important cloud market.
Overall, the fundamentals supporting these big tech names remain strong. So long as the fundamentals remain strong, big tech stocks will keep rallying in this bull market. So long as big tech stocks keep rallying, Microsoft stock will keep rallying, too.
Microsoft Has Healthy Long-Term Drivers
The second reason investors should stick with Microsoft is because the company has healthy long-term drivers which investors want exposure to.
The big story at Microsoft is that this company is making huge moves in the cloud market. Specifically, Azure has been on fire, and is gradually stealing share from cloud market leader Amazon Web Services (AWS).
Considering Azure is growing at an 80%-plus rate and AWS is growing at a sub-50% rate, it looks like Microsoft will continue to steal cloud market share from Amazon for the foreseeable future.
Moreover, Microsoft has a suite of other cloud offerings (namely, Office 365 and Dynamics 365). Both of those businesses are growing at 30%-plus rates.
Overall, Microsoft is the beneficiary of hyper-growth in its rapidly scaling cloud businesses. As those businesses get bigger and bigger, they become a larger and larger contributor to overall revenue growth. That is why revenue growth and margins have steadily improved over the past several quarters.
If this trend persists, and there is no reason to believe it won’t given cloud ramp, MSFT should head higher. Investors want cloud exposure.
The more Microsoft looks like a cloud company with 20%-plus revenue growth and booming margins, the more demand there will be for Microsoft stock. Thus, so long as Microsoft’s cloud push continues to play out as planned, Microsoft stock will head higher.
Valuation Is Reasonable
The third reason investors should stick with Microsoft stock is because the stock’s valuation is reasonable for a cloud giant.
When you think about the cloud space, the Big 3 come to mind: Amazon, Alphabet, and Microsoft. There are also the class of stocks which Jim Cramer calls the “cloud kings,” and those include Salesforce (NYSE:CRM), Adobe (NASDAQ:ADBE), ServiceNow (NYSE:NOW), Red Hat (NYSE:RHT), VMWare (NYSE:VMW), Splunk (NASDAQ:SPLK), and Workday (NYSE:WDAY).
The average forward earnings multiple in that group is 60, which is pretty expensive. The cheapest stocks are Google, Microsoft, and VMWare. But, VMWare is growing revenues at a low-teens rate, while Google grew revenues at a 20%-plus rate last quarter and Microsoft reported high-teens revenue growth.
Thus, if you are looking for the most bang for your buck in the cloud space, Google and Microsoft are the obvious choices.
Considering Google is more about digital advertising than cloud, and Microsoft is far more about cloud than digital advertising, the optimal value play in the cloud market is MSFT.
So long as this remains true (cloud growth remains robust and valuation remains subdued relative to peers), Microsoft stock will be a winner.
Technicals Are Strong
Microsoft crossed above its 200-day moving average and started its uptrend in July 2016. The stock hasn’t looked back since, roaring more than 120% higher over the past two-plus years.
During that stretch, Microsoft hasn’t once tested its 200-day moving average, a testament to the mitigated volatility in the stock. Meanwhile, the stock always seems to hold its 50-day moving average.
In other words, Microsoft has established a very strong, multi-year uptrend. There isn’t anything that threatens this uptrend in the near to medium terms, so Microsoft stock should stay in rally mode for the next several months.
Bottom Line on MSFT Stock
Microsoft stock has been, still is, and will remain a winner thanks to robust cloud growth converging on a reasonable valuation.
As of this writing, Luke Lango was long FB, AMZN, NFLX, GOOG, AAPL, NVDA, ADBE, and NOW.