- Microsoft continues to carve out a large portion of the $200+ billion cloud market for itself.
- Microsoft has recently usurped Salesforce to become the market leader in the overall enterprise Software-as-a-Service (SaaS) market.
- It recently announced a $40 billion stock buyback as well as 2.7% dividend hike.
Since president-elect Donald Trump’s surprise election victory, large-cap technology stocks such as Apple (NASDAQ:AAPL), Alphabet Inc-C (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) are in a period of consolidation as many fear that Trump’s tough stance against tech companies could play out in the months to come. During the campaign trail, he hinted that he could reign in international trade agreements, limit the scope of net neutrality and tighten immigration policy for skilled tech workers, which would prove a drag on the earnings potential of large-cap technology companies like Microsoft.
More than 90% of Microsoft’s cash (approx. $100 billion) is held by its overseas subsidiaries, which prompted many to assume that Trump’s tax pledge to introduce a one-off repatriation tax rate of 10%, represents a boon for Microsoft as it would potentially net a $25 billion tax windfall than if it were subject to the current repatriation tax rate of 35%. However, a 10% rate is still higher than the rate it pays in a few of its overseas domiciles, so Microsoft is unlikely to repatriate a large chunk of its $100 billion cash pile to benefit from the ‘Trump Tax plan’.
Favorable policies aside, Microsoft’s efforts to diversify its revenue beyond personal computing have been nothing short of extraordinary. The tech giant continues to carve out a sizeable portion of the rapidly growing $200+ billion cloud market for itself. (Also Read: Can Mobile Be A Growth Driver For Microsoft Corporation (NASDAQ:MSFT)?)
Its three main cloud cash cows, Dynamics CRM, Azure and Office 365 have experienced phenomenal growth over the past few quarters, particularly impressive is the more than 50% boost in the number of Office 365 subscribers reported early during the year. Also, having usurped Salesforce to become the market leader in the overall enterprise Software-as-a-Service (SaaS) market during Q2’16, Microsoft is well positioned to cement its SaaS position in 2017 as there remains lots of room for expansion – the SaaS market is predicted to triple in size during the next five years.
Take advantage of any consolidation
The tech giant recently announced a $40 billion stock buyback as well as 2.7% dividend hike and having already captured LinkedIn earlier during the year, Microsoft could use its $100 billion cash pile to target further acquisitions in order drive further growth in its key growth markets, as economic growth and cheap credit are usually the perfect cocktail for M&A activity. (Also read: Can A Rejuvenated Microsoft Corporation (MSFT) Take On Apple?)
Currency headwinds will prove to be a drag on earnings as Microsoft has a lot of exposure to the overseas market. It’s more vulnerable to a strengthening US dollar, something which has been thematic over the last few months and is widely expected to continue. Although Microsoft trades at a premium, at a price to earnings multiple of around 28x, a notch higher than the sector average, any downside pressure on the stock should be viewed as a long-term buying opportunity.
Looking to buy technology stocks? Here is the list of our latest Top Tech Stock Picks which have outperformed the market.