With market taking notice and also MSFT stock hitting all-time high, 2017 could be the year of Microsoft Corporation.
Microsoft (NSDQ:MSFT) is trading at all-time highs after rallying nearly 20% in the last twelve months. Thanks to robust growth and high expectations from Microsoft’s strongly growing cloud business, Microsoft has truly transformed itself, as well the market sentiment along with it. But there are several crucial factors at play which are bound to cement Microsoft’s position near the top of the tech industry for the next few decades. Here are 3 strengths of Microsoft which suggest MSFT stock is one you should not miss out on.
Strength 1: Balance Sheet
Microsoft’s balance sheet is not something that people would normally include if they are asked to list the company’s strengths. But Microsoft’s balance sheet is as good as you can expect from a company of this size, and something which I strongly believe provides a huge support pillar for Microsoft’s future at the top of the tech world.
At the end of Q1 2017, Microsoft had $136.932 billion cash on hand, while their total liabilities stood at $142.152 billion. Microsoft’s short-term debt was $14.5 billion and long-term debt was $60.15 billion. Even if Microsoft decided to bring back cash from overseas and pay 40% tax on it, they would be able to clear all their short term and long term debt and still be left with billions in hand. Apple Inc (NSDQ:AAPL), Microsoft and Alphabet Inc (NSDQ:GOOGL) - all three companies are sitting on a mountain pile of cash that will allow them to plow it back into the business when necessary, making big, bold acquisitions as and when required.
Strength 2: Rising SaaS
Microsoft’s commercial cloud revenue run rate is just over $13 billion and includes revenues from Office 365, Azure, Dynamics and other cloud products. A run rate of $13 billion means Microsoft made a little more than a billion dollars in the last month of their latest quarter, which is what they use to calculate run rate. Amazon Web Services had $3.125 billion in quarterly revenues, and they hardly have a presence in the Software-as-a-Service market - at least not to the extent Microsoft does.
A significant portion of Microsoft’s cloud revenue comes from their SaaS products led by Office 365, commercial revenues of which are growing above the 50% year-over-year rate for the last several quarters. The moat they have in this space is tremendous, and it will take years even for a solidly-backed product like GSuite from Google cloud to reach the scale that Office 365 has.
The beauty of Microsoft’s ever-increasing SaaS portfolio is that it is focused on serving one single purpose: to dominate workplace productivity in the enterprise segment. The Office suite includes Word, Excel, Powerpoint, OneNote, Outlook, and Skype. Then, you have Microsoft Power BI for business intelligence solutions, Microsoft Dynamics if you need CRM or ERP-based solutions and, finally, Microsoft Azure to host all your data and your entire infrastructure, if required.
All of their applications, as well as cloud solutions, have enterprise and business customers at the focal point. As business customers move in and get used to the applications, which is more of a bundle than a standalone application, their operations will invariably start depending on that bundle for their performance. Moving out or switching to another vendor will be more trouble than it’s worth because their entire workforce would have to be retrained and re-oriented to a new suite of tools. To me, that’s as strong a moat as a company could ever have.
Strength 3: IaaS Advantages
Microsoft Azure has been clocking triple-digit growth speeds in the last four quarters. That’s massive growth in an industry that is getting increasingly competitive with Oracle (NYSE:ORCL) and Google recently throwing their hat into the ring. Microsoft Azure will stand out from the crowd due to their strength in the SaaS market, which is something that no one single Cloud Service Provider (CSP) has at the moment at such scale. This will allow back and forth sales from both ends - a Microsoft Azure customer adding Office 365 to their plan or vice versa because each service is just a click away.
These three strengths will play a huge role in Microsoft’s future, and with the acquisition of LinkedIn closing recently, Microsoft will have access to a huge pool of enterprise/business customers which should provide their cloud and office applications a nice short-term surge and long-term sustainability. When the world’s largest professional cloud meets the world's largest professional network, there will be a lot of synergies that Microsoft will be able to exploit.
“LinkedIn also could supercharge Microsoft’s Customer Relationship Management (CRM) software, used to identify and track sales leads. Microsoft is in fourth place in market share among the large CRM players, including Salesforce.com Inc., SAP SE and Oracle Corp.” Wall Street Journal
What This Means in Terms of Investing
Microsoft has truly transformed itself after multiple setbacks over the last few years. Their multibillion-dollar Nokia acquisition didn’t pay off, and Windows sales are never going to get back to old days thanks to global PC sales, which is on its way to recording its fifth consecutive year of decline. But despite those setbacks Microsoft has clearly identified its future focus areas and the best part is that all their cloud and mobility products are aligned to business consumers.
The market has taken notice and, as a result, the stock has been pushing all-time highs. The stock is trading at 6 times sales and it looks reasonable priced at this level. If you want to get in, you can just keep adding as and when the price dips around earnings calls.
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