Why Microsoft (MSFT) Stock Will Rise Over the Long-Term

Microsoft (NASDAQ: MSFT) stock did not enjoy its usual post-earnings rally. The company issued a conservative forecast, citing weak Windows 10 sales and expectations for ongoing headwinds for the PC market as its two biggest upcoming headwinds.

Despite the mixed outlook, Microsoft’s profits continued to rise, largely due to its cloud business, its Office 365 product, and a few of its recent acquisitions.

Second-Quarter Results

MSFT reported second-quarter earnings of $1.10 per share. Its revenue rose 12% year-over-year to $32.5 billion. Two of its biggest businesses –Productivity and Business Processes and Intelligent Cloud —   did very well. The revenue of the Productivity and Business Processes unit grew 13% YoY to $10.1 billion. Within that unit, LinkedIn’s revenue grew an impressive 30%. Intelligent Cloud’s revenue increased 21% YoY to $9.4 billion. Azure’s sales surged 76%, so Microsoft’s cloud business is clearly performing very well.

Constraints on the PC Market And Windows 10 Hurt Microsoft Stock

If the owners of Microsoft stock could complain about something, it would be the slow growth of the company’s Windows 10 sales, which was caused by the anemic PC market. Microsoft’s PC business shrunk last quarter due to the timing of the deliveries of chips to PC makers.

Tight supplies from Intel (NASDAQ: INTC) and the launch of new chips by Advanced Micro Devices (NASDAQ: AMD) probably negatively impacted the PC market.

Still, more companies are buying Windows 10. Businesses demand more security and productivity software, and Windows 10 provides both. At CES, PC makers showcased an “always connected” Windows 10-powered PC. Immersive gaming was one of the scenarios it demonstrated.

Strong Surface Momentum

In the hardware segment, Microsoft’s Surface tablets continued to have positive momentum. The company expects sales of Surface Pro 6, Surface Book 2, and Surface Go to continue to be strong. Sales of Surface products grew 20% year-over-year in Q4.

The Cloud Unit’s Results Were Strong, As Usual

Office 365 subscriptions and Azure usually drive Microsoft’s profits, but investors forget about its other cloud businesses. Power BI and Dynamics 365 continue to offer business customers valuable tools.

Meanwhile, MSFT is widening its market through acquisitions. It closed its acquisition of GitHub, acquiring 31 million developer accounts in the process. The unit has over 100 million code repositories. Microsoft says that over half of Fortune 50 companies use GitHub Enterprise.

MSFT updated GitHub and simplified its platform, making Microsoft’s offerings easier to access from GitHub.

Other Acquisitions

MSFT bolstered its gaming library for Xbox Live by acquiring two studios last quarter. Now the over 64 million gamers who use the platform have more reasons to renew their subscriptions.

The Valuation of Microsoft Stock

The 21 Wall Street analysts who cover Microsoft stock have an average price target of $123.26 on MSFT stock, representing upside of about 15%. The price-earnings ratios of MSFT stock, which are currently in the 22 – 25 range, are also compelling. Moreover, Microsoft stock became less volatile in 2018 because its main businesses performed in-line with expectations.

The Bottom Line on Microsoft Stock

Microsoft stock is the kind of investment that may appreciate over time while paying a modest 1.7% dividend yield. When PC makers resolve their supply issues, the sales of Windows 10 should rebound. But the company’s bigger profit drivers — acquisitions and the cloud — are the reasons to buy and hold Microsoft stock over the long-term.

As of this writing, the author did not hold a position in any of the aforementioned securities.

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