If you’re a Microsoft (NASDAQ:MSFT) shareholder, you are probably fairly happy about the performance of Microsoft stock during the October correction, since MSFT stock outperformed most other tech names last month.
Microsoft stock fell 6.6% in October compared to 41.1% and 25.0% for Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA) respectively.
Although Amazon (NASDAQ:AMZN) is the biggest cloud company in the world and Microsoft’s biggest competitor, it’s not considered a tech company according to the Global Industry Classification Standard (GICS) but rather a consumer discretionary business. But at any rate, AMZN stock lost 20.2% in October.
A wise person once said it pays to be grateful in life. As we move into the next-to-last month of 2018, MSFT shareholders can be thankful that Microsoft is a growth stock and a value stock, making it one of the safest tech stocks at the moment.
MSFT Stock Is a Growth Play
InvestorPlace contributor Luke Lango recently discussed Microsoft’s improving growth trends. If Lango’s observations don’t make you grateful to be a long-time owner of MSFT stock, nothing will.
“At the start of fiscal 2016, revenues at Microsoft were declining. By the beginning of fiscal 2017, revenues were growing by 2%-3%,” Lango wrote in an article published on October 28. “At the start of fiscal 2018, revenue growth was in the 10%-plus range. Now, at the start of fiscal 2019, revenue growth is nearing 20%.”
MSFT CEO Satya Nadella took the top job at MSFT in February 2014, right in the middle of its third quarter. At the time, Microsoft was struggling to increase its sales and the morale of the company’s employees was low.
Although I’ve been critical about Nadella’s pay in the past, there’s no way you can deny that the changes he’s made at Microsoft have returned it to growth mode after several years of stagnating revenues.
A CEO is paid to improve the results of his or her company, and Nadella’s done just that.
That’s why in April I made MSFT one of seven platform stocks to buy, arguing that the moves it’s made in the cloud, artificial intelligence and the Internet of Things have diversified it away from Windows into a multi-dimensional business capable of meeting the needs of its biggest customers.
It’s definitely not the same company as it was in 2014.
Microsoft Stock Is a Value Play
MSFT stock is up 22% year-to-date and an average of 26% annually over the past five years. Despite these significant gains, Microsoft stock still has an attractive dividend yield of 1.73%.
In addition, it repurchased $3.7 billion of its stock in the fiscal first quarter of 2019, 46% more than it repurchased a year earlier. In Q1 of 2019, it returned almost $7 billion of its $10.1 billion of free cash flow, a payout ratio of just under 70%.
So not only is MSFT growing its revenue by double digit percentage levels, but it’s managing to return a significant chunk of its free cash to investors, making it an income investors’ dream stock.
Although Microsoft stock’s forward price-earnings ratio of 24.4 means that it isn’t a traditional value play, its ability to grow its free-cash flow despite increasing the amount it spent on its business by almost 50% in fiscal 2018 suggests that it provides growth at a reasonable price, giving investors the best of both worlds.
The Bottom Line on Microsoft Stock
In August, I suggested that MSFT stock was worth owning for the long haul. However, I also recommended that investors wait for the stock to correct into the mid-$90s.
If the October correction couldn’t move Microsoft stock into the $90s — it hit a low of $100.11 on Oct. 30 — I’m not sure if MSFT stock will leave triple digits anytime soon.
So if you want a tech stock that will play both offense and defense, MSFT stock is the perfect pick.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
