Have you seen the new three-part documentary on Netflix (NASDAQ:NFLX) about Bill Gates? It’s a must-view film for anyone who is a Microsoft (NASDAQ:MSFT) shareholder. Heck, it’s a good idea to watch even if you don’t own Microsoft stock but want to learn more about both the founder and the company.
Sure, Satya Nadella’s top dog these days, but Gates still owns 103 million shares of MSFT and continues to sit on the board of directors. His influence remains intact.
Indeed, if you’re looking for reasons to own Microsoft stock, Gates’ ownership stake helps fund the Bill and Melinda Gates Foundation, which supports worthwhile causes in less fortunate parts of the world. I don’t think you can get any better reason than a charitable one.
Gates, although busy with the foundation, knows that a successful Microsoft is a key to his ongoing philanthropy. And while he’s no longer at the company on a day-to-day basis, you can be sure that a day doesn’t go by where he doesn’t think about the business.
I’ve given you one reason to own Microsoft stock. Here are seven more.
Reasons to Buy Microsoft Stock: Cloud Business
Type the words “Microsoft Cloud” into a search engine and you will get 4.2 million results. Five years ago, I doubt you would have gotten one-tenth as many. Microsoft’s cloud business has taken off, and that’s been a significant driver of MSFT stock.
Thanks to a desire for a hybrid cloud, Microsoft has positioned itself to benefit for years to come.
“In a world increasingly moving to the cloud, but still encumbered by legacy investments that sit elsewhere and still drive value today, Microsoft is uniquely positioned to take an increasingly large percentage of corporate IT budgets in a hybrid world,” stated RBC Capital Markets in a note to clients.
In just a few hours Microsoft will report its first-quarter 2020 earnings. You can be sure that the cloud will take up a lot of ink as management discusses all the good things happening to this important segment of its business.
Surface Broadens Horizons
It’s been almost two years since I wrote about Microsoft’s devices business being in better shape than most people realized. Despite my August 2017 suggestion that Microsoft should sell this segment of its business, which includes Surface laptops, the company has done an excellent job keeping Surface competitive.
Flash forward to today. Microsoft’s Surface products are doing very well.
Earlier in October I pointed out that the Surface generated $4.8 billion in revenue in fiscal 2019, 23% higher than a year earlier. The Surface only accounted for 3.8% of the company’s annual revenue of $125.8 billion. But InvestorPlace’s Brad Moon stated Oct. 18, “Its [Microsoft] Surface products have evolved into best-in-class devices that embrace technology trends.”
Like Disney’s (NYSE:DIS) various cartoon characters which promote the Disney brand, the Surface acts as an advertising vehicle for the entire company. And you can’t put a price on that.
In September, Microsoft announced that Windows 10 is running on 900 million devices. It expects to hit 1 billion devices sometime in 2020. Since it added 100 million devices in six months, going from 800 million to 900 million, it could hit 1 billion before next summer.
The amazing thing about Windows 10 is that Microsoft thought it could get to 1 billion within 36 months of the operating system launching in 2015. While that didn’t happen, you have to give it credit for remaining patient despite a slower-than-anticipated liftoff.
The exciting part about Windows 10 is that the company’s support for Windows 7 ends this January. After that, you can be sure that users of Windows 7 will upgrade to Windows 10, generating even more revenue for Microsoft.
In 2019, Windows accounted for about 50% of the $45.7 billion in annual revenue generated by its More Personal Computing segment, which translated into almost $13 billion in operating income.
While the cloud gets a lot of positive public relations, Windows pulls its weight at Microsoft.
Analysts Love MSFT
According to the Wall Street Journal, 32 analysts cover Microsoft with 27 “buy” ratings, three “overweight” and two “hold” ratings.
On Oct. 8, Jefferies Financial upgraded Microsoft to a “buy” with a $160 target price, 17% higher than its current stock price. Analyst Brent Thill believes that MSFT is one of the safest bets among software stocks.
As I stated previously, RBC Capital Markets recently initiated coverage with an “outperform” rating and the same $160 target price.
“With the unmatched depth and breadth of its technology portfolio, we believe the company has multiple levers to grow revenue, margins, and its customer base over the next several years,” RBC Capital Markets’ analysts stated Oct. 18.
After a blowout fourth-quarter report, the expectations for Q1 2020 are getting higher by the minute. However, current shareholders have nothing to worry about.
Microsoft’s on its A-game these days.
If your business already uses Azure, Office 365 or Outlook, there’s a better-than-ever chance they’ll also end up looking to Microsoft Teams for enterprise collaboration. In March, Teams turned two years old. To celebrate this fact, the company announced that Microsoft Teams is used by more than 500,000 organizations around the world.
A recent article from UCToday contributor Rebekah Carter highlighted the predicament that Slack faces as it tries to beat back Microsoft.
“… Microsoft has been slowly killing Slack over the last few years, focusing just a small amount of its attention on gradually undermining the alternative collaboration tool,” Carter wrote Oct. 9. “While it took Slack nearly 6 years to achieve 10 million daily active users, Microsoft Teams has already achieved 13 million daily active users in only 3 years.”
Like most large businesses, Microsoft will be more successful if it focuses on a few important categories.
Microsoft Teams has yet to become a key priority for the company, but if you believe the online chatter, that’s set to change in 2020. That’s terrible news for Slack.
CEO Earned His Pay
My InvestorPlace colleague Brad Moon recently discussed what a great job Nadella has done in almost six years as chief executive.
“In the five and a half years since Satya Nadella has been CEO of the company, Microsoft stock has increased in value by 286% and its market cap has broken through the trillion-dollar ceiling,” Moon wrote.
To compensate Nadella for his good works, the Microsoft board upped his fiscal 2019 total compensation by 66% to $42.9 million. That doesn’t include the $178.5 million Nadella made on vested stock awards.
Twice in 2017 I argued that Nadella was overpaid. Nothing has changed in the two years since. He’s still overpaid.
But as Moon points out, if Microsoft’s stock performance is the metric for measuring his success, Nadella must be at the top of the charts. And that is the only system we’ve got at the moment.
In my 2017 article, I facetiously asked the question, “Why should you care [about the CEO’s compensation] as long as you make money on MSFT stock?”
Today, I believe the same question applies, only I’m not facetious.
The two biggest growth drivers for Microsoft are the cloud and artificial intelligence.
As InvestorPlace’s Tom Taulli suggests, AI may be bigger than the cloud. To that end, Microsoft is investing significantly on acquisitions, AI startups and internal spending to develop its existing AI platforms, including Azure’s tools for machine learning.
Still, in the early stages, AI could end up being the bigger catalyst for driving Microsoft revenues.
However, we won’t know for a few years. In the meantime, the company continues to generate significant free cash flow — $38 billion in the trailing 12 months — and that alone is a reason to own MSFT.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.