Microsoft (NASDAQ:MSFT) touched a new all-time recently week as optimism built around its Windows 11 presentation, which took place on June 24. Many investors might be wary of MSFT stock and other big tech names due to the widely spread narrative that they’re overpriced and the fact that regulators are on a mission to tackle data acquisition activity.
In my opinion, this is all just noise. Big tech has reached a mature phase due to it becoming a necessity in our lives for both work and discretionary purposes. And the FAANG stocks — Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) — have opened up a large value gap. They not only have extremely successful cash flows, but their asset bases are also being increased by asset and data acquisitions.
Streamlining Business Units
Microsoft has always focused on constant innovation. The firm’s been dominant on the desktop PC front, but the bring-your-own device concept has somewhat replaced the trend. Microsoft has adapted by introducing new Surface devices, which could lead enterprises to stick with Windows.
Furthermore, expansion in Microsoft teams subscriber base is aiding the company in expanding on enterprise communications. Teams surpassed 145 million users in 2021. Plus the growing gaming industry is boosting sales of its Xbox and other gaming hardware. Online gaming is also being accommodated with various interactive features.
In order to streamline the cost basis of revenue, Microsoft has doubled down on cloud computing. In the cloud computing space, IT and apps are increasingly stored, and managed from the cloud, where devices access only necessary amounts.
There’s also plenty of optimism surrounding the upcoming Windows 11 platform due to its simplification and improvement in built-in apps. The stock price surged as a result, which is indicative of investors being optimistic about its future. Windows 11 adds to a long string of software and hardware products, further diversifying the company’s cash flow and residual to investors.
MSFT Stock Acquisitions and Numbers
Many people think that organic growth drives big tech expansion, but growth is often actually bound to asset and data acquisitions.
Microsoft has completed more than 200 of these acquisitions since 1994, with four being completed in 2021 — The Marsden Group, Nuance Communications, Kinvolk and ReFirm Labs. The Media’s been covering “potential crackdowns on big tech,” but the fact of the matter is that the Department of Justice and the Federal Trade Commission are still trying to regulate new era companies with a previous generation model.
It’s just not working.
So, how should investors think about MSFT stock? A Piotroski score of 8 means that the company’s balance sheet is in good health. And its total debt/equity of 60.41% is accompanied by an interest coverage ratio of 20.44x, which means that the firm can cover its debt comfortably and subsequently use its debt for expansionary purposes.
Furthermore, a strong asset base means that Microsoft has an absolute value of $262 per share, which converges with market value. Because tech stock valuations are trading well above the intrinsic value while Microsoft’s trading at its fair value, I’d say it’s a good deal at the moment.
Microsoft believes in rewarding shareholders with share buybacks and dividend programs. In the third quarter of 2021, the firm returned $10 billion to shareholders in dividends and repurchases. Free Cash Flow has been growing at an average rate of 16% over the past five years. The increase in cash might allow the company to build on its repurchase ratio of 0.6, which is higher than 90% of the software industry.
Takeaway on Microsoft
Microsoft’s all-time high is justified through strong company efficiency. Investors shouldn’t be discouraged by a recent surge in the stock price as the stock has a long way to run if one considers the value landscape developing within big tech. I’d say that the stock is a safe buy with a Beta of 0.79; the stock also has a history of beating the S&P 500. Microsoft is a good deal at the moment!
On the date of publication, Steve Booyens held a long position in MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, Benzinga, Gurufocus, and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency, and ESG.
