Microsoft (NASDAQ:MSFT) stock is finally No. 1.
At its opening price of $101 per share on Jan. 7, MSFT stock had a market cap of $782 billion, which made it the most valuable company in the world. This left Amazon.com (NASDAQ:AMZN) trailing behind in second place, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) in third and Apple (NASDAQ:AAPL) well back in fourth place.
Yet Microsoft stock remains, relatively speaking, a value stock. Its price-to-sales ratio is barely over 6.5; its trailing price-to-earnings ratio is 42 and it pays a dividend of 46 cents that’s yielding 1.82% if you buy now. By these metrics, Amazon and Alphabet are far more expensive.
MSFT stock is No. 1 because it’s mainly in the business of making business tools, of renting cloud-based software and workspace to businesses like Adobe (NASDAQ:ADBE). While Windows’ share of the desktop operating system market remains 82%, the size of that market peaked in 2011 and is not projected to grow.
Microsoft has risen, in short, because the other Cloud Czars have fallen.
Is MSFT Stock Overpriced?
Microsoft began growing again in 2017, and revenue for its 2018 fiscal year, which ended last June, was over 15% higher than ever, at $110 billion. For the 2019 fiscal year, it is on pace to top $120 billion in revenue, and its earnings are growing even faster.
For its first fiscal quarter, for instance, MSFT revenue was $29.1 billion — up 19% — and net income was $8.8 billion, up 34% from a year earlier. MSFT is bringing 30% of its revenue to the net income line and is projected to report $32.2 billion in revenue for the December quarter on Jan. 30.
The turnaround begun by CEO Satya Nadella is complete. The strategy of building everything into the Azure cloud is finished, and Microsoft now has data centers on every continent. Its strategy of accepting open source is finished, with the acquisition of GitHub — the largest open source repository.
But where does it go from here? Nadella talks about “tech intensity,” a mindset in which all companies are tech companies, writing their own software on top of MSFT’s tools.
In other words, more of the same.
Platforms, Not Applications
Microsoft is now adding incremental pieces to its platform, like XOXCO, a studio for creating conversational bots, built with artificial intelligence, that demonstrate its own Microsoft Bot Framework to replace phone operators and customer service agents.
Microsoft appears immune to the antitrust worries now enveloping the other Cloud Czars because it is less a set of applications than a platform companies can build on. Its Cortana voice interface is a failure in the consumer market, but as part of the Bot Framework it’s a raging success.
This strategy limits how much MSFT earns from Artificial Intelligence (AI), but allows it to control the market, watching others make mistakes using its tools. In theory, it means that MSFT can “embrace and extend” over time, competing with its customers on a multi-year lag and taking the all-important “second mover advantage,” profiting from their mistakes.
The Bottom Line on Microsoft Stock
Microsoft produced a video of what 2019 would be like, 10 years ago, and while it’s inaccurate, it’s not as embarrassing as many visions of “the future” are.
MSFT was wildly wrong on the hardware, but its view of software is accurate. Real-time language translation exists, there are smart contracts and cameras can identify objects. We’re just using them on smartphones that were already common then, not on flashy “smart desks” and “smart walls.”
This is the key to Microsoft stock’s future as well. It’s a tools company, a platform company. It lets others build the future and take the risks, making its stock a defensive play perfect for the current bear market.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL, MSFT and AMZN.