Microsoft (NASDAQ:MSFT) stock is up almost 30% this year and nearly twice as much off its March lows, but even with a $1.55 trillion market capitalization, Microsoft can still deliver for investors.
The software giant is jostling with rivals Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) to be the first company to enter the $2 trillion club. While that illustrious distinction is far away for all three, Microsoft still offers ample appreciation potential.
Yes, investors buying Microsoft today will be paying a forward earnings multiple of 31.25 and a sales multiple of 11. Those are growth stock multiples because, well, Microsoft is a growth stock. It’s the largest component in the S&P 500 Growth Index at a weight of 10%.
That status shouldn’t be off-putting to investors. They should embrace it because over the past decade, growth stocks handsomely outperformed their value rivals.
Researchers at Columbia University’s business school suggest that many investors are seduced by low price-book ratios, thinking they’re getting a good deal, when in reality growth stocks can be less risky than value names.
Near-Term Microsoft Momentum
A large part of the thesis for Microsoft revolves around the company’s burgeoning Azure cloud business, the second-largest cloud computing outfit beyond Amazon’s Amazon Web Services (AWS). Within Azure is Teams, Microsoft’s competitor to Slack (NYSE:WORK) and Zoom Video (NASDAQ:ZM).
That means Microsoft is a credible novel coronavirus idea and/or a play on the seismic shifts happening in the way people work. The economy started reopening in May, but even now many parts of the U.S. are awash in new cases of Covid-19. Many folks haven’t returned to their offices and some that have could easily be sent back to remote status in the name of safety.
Even if a vaccine for the vaccine emerges tomorrow, how and where folks work is dramatically altered and that’s to the benefit of companies with cloud computing footprints. Remember, Microsoft CEO Satya Nadella recently said, “We’ve seen two years’ worth of digital transformation in two months.”
Adding to the Azure case is that while cloud computing itself is classified as a disruptive technology, it also serves as a foundation for other technologies that are shifting the corporate and consumer landscapes.
Data confirms that Azure is making significant inroads against rival AWS. Earlier this year, a Goldman Sachs survey of 100 information technology executives at large companies revealed 56% use Azure while 48 percent deploy AWS.
The Bottom Line for MSFT Stock
There are more than just other factors that bode well for Microsoft over the back half of 2020, but I’m going to mention a pair here.
First, through Azure Office 365 and Dynamics 365, among other offers, Microsoft transitioned to a subscription model perhaps more effectively than any large IT company in recent memory. The benefit there is two-fold: accelerating and predictable revenue.
Second, Microsoft is a legitimate gaming company and the latest version of the Xbox is coming just in time for the holiday shopping season. It’s widely known that this is the year of the hardware upgrade cycle, but Microsoft could potentially surprise gamers and investors with unexpected offerings. Plus gaming, like work from home, is one of the few non-healthcare investment strategies benefiting in earnest from the pandemic.
Wrapping it all up, Microsoft stock is up quite a bit, but it has the management team and the catalysts to deliver more upside for shareholders.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
