Microsoft (NASDAQ:MSFT) isn’t the old and boring dinosaur that we used to know. It’s one of the few legacy tech companies that have been able to return to its glory days, as it stays at the cutting edge of the tech sector. Microsoft’s advanced technology has propelled Microsoft stock higher by 32% this year and more than 50% over the past 12 months.
Wow, talk about performance!
Helping lead that drive is Microsoft’s cloud business, Azure, as it continues to rack up year-over-year revenue growth in excess of 90% each quarter. While this segment was small for several years, the market has begun appreciating its outsized growth over the last year. Azure’s accelerating revenue is helping to drive MSFT’s overall growth higher, boosting the valuation of Microsoft stock.
We’ve made the case that the cloud is still in its early days in terms of potential and disruptiveness. It makes people’s lives easier and makes business vastly more efficient. Because of this, investors and the market are beginning to realize how much room the cloud has to grow. For the record, I wrote about the potential of Microsoft’s Azure and artificial intelligence businesses just over a year ago.
Valuing Microsoft Stock
Microsoft is now in its fiscal 2019, and analysts expect its earnings per share to grow roughly 10% to $4.28. That leaves MSFT stock trading at about 26 times earnings, which is not exactly a bargain for a company that’s growing at a 10% clip. Beyond that, though, analysts expect the company’s sales to rise 11.2% this year. Since analysts expect Microsoft’s sales growth to outpace its earnings growth, they obviously believe that its margins will contract, although by a relatively small amount.
For fiscal 2020, the opposite is true, though, as estimates call for earnings growth of 14.7% and sales growth of 10.5%.
On the surface, it’s hard to justify a valuation of 26 times earnings for Microsoft stock when we’re talking about roughly 12% annualized earnings growth over the next two years.
But you have to consider what kind of company we’re talking about. This is Microsoft, a tech titan that has ruled and dominated for decades now. It’s not a fly-by-night cloud stock that we hope doesn’t lose a big client next quarter. It’s not expensive like ServiceNow (NASDAQ:NOW), Twilio (NYSE:TWLO) or the countless other high quality but expensive names in the market.
This is Microsoft. It will dependably deliver double-digit growth this year, next year and likely the year after that. Investors can depend on its proven CEO, Satya Nadella, and count on MSFT continuing to be a leader in the cloud and productivity sectors.
Finally, while Amazon (NASDAQ:AMZN) is a leader in the cloud space, how many retailers — who are having their lunch eaten by Amazon — want to buy their cloud services from AMZN? That’s why names like Target (NYSE:TGT), Walmart (NYSE:WMT) and others are going with MSFT and more will follow over time.
Trading Microsoft Stock
One last note on Microsoft’s valuation: While Microsoft stock isn’t cheap by traditional standards, it’s vastly more attractive than a number of other old-school, blue-chip stocks that are not in the technology sector. Further, MSFT stock has a lower valuation than most of its cloud peers, although it is growing more slowly than most of them as well.
As for the price action of Microsoft stock, it has been a beast.
The shares had been on a solid uptrend for some time, but Microsoft stock has really stepped on the gas lately. However, I don’t want to buy MSFT stock here as it’s making all-time highs.
Instead, aggressive bulls can buy Microsoft stock on a pullback to uptrend support # 1 (which is depicted by the blue line on the chart). That level also happens to be the stock’s 50-day moving average. Conservative bulls may want to wait for a pullback to uptrend support # 2 (depicted by the black line), which happens to be the 100-day moving average.
The $105 to $107 area could also act as solid support, based on the prior price action of Microsoft stock.