Microsoft Corporation stock could be a safe long-term bet, with any pullbacks a good buying opportunity.
After being dormant for years, Microsoft (NASDAQ:MSFT) stock has investors excited again, gaining over 130% in the last four years. 2016 was no exception with more than 13% return YTD. MSFT stock is trading near its all-time highs. 2016 has been mostly a transition year for Microsoft, it has a lot of momentum going into 2017 under the strong leadership of Satya Nadella. Some in the analyst community tip Microsoft to beat other tech giants like Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL) to the $1 trillion market cap mark. Investment houses like Piper Jaffray, JP Morgan have recently upgraded Microsoft's rating to overweight. Microsoft as a company is cool again and here's why you should not miss on MSFT stock in 2017.
The Race To $1 Trillion Mark
According to Equities.com analyst Michael Markowski, Microsoft could be the first digital company hit a $1 trillion market capitalization. As of Thursday, Microsoft had the third largest market cap of $486.83B, behind Apple Inc ($619.79B) and Alphabet Inc ($543.04B). Microsoft's $26 billion acquisition of LinkedIn is the big ticket according to analyst Michael Markowski. The LinkedIn acquisition expands its PE and positions Microsoft to capitalize from emerging online crowdsourced funding. Michael Markowski states"It has a monopoly on the business social media niche or community." It is well positioned to take advantage of tons of data of 467M LinkedIn users. Microsoft also plans to use LinkedIn’s social graph to bolster its customer relationship management tool to compete with industry-leader salesforce (NYSE:CRM).
Based on its market cap and share price, Microsoft has the highest free cash yield among the contenders to reach $1 trillion mark. This metric gives Microsoft the edge over others in accessing capital markets to expand its business and for new acquisitions. Microsoft is heading in the right direction under Satya Nadella, and though still under transition, one can be very optimistic about Microsoft's prospects.
Momentum is with Microsoft
Firms including Piper Jaffray, J.P Morgan, and Merrill Lynch recently raised price targets for the company’s stock, signaling renewed confidence in Microsoft’s ability to grow. Piper Jaffray analyst Alex has set a price target of $80 which has an upside of more than 27% from Microsoft's yesterday close price of $62.90. He considers Microsoft's accelerating cloud business along with Office 365 and LinkedIn synergies as chief drivers of growth. Given Microsoft's latest initiatives, this target looks very achievable in 2017.
According to Forrester Research analyst Dave Bartoletti, Microsoft's cloud offering Azure is now a strong number two in public cloud while Google, IBM, and others battle it out for the number three slot. And market leader AWS will not have it easy in 2017 due to heightened competition. Not only Cloud, Microsoft may have other unlikely catalysts in the form of its Surface series. November was the best month on record for consumer sales of Microsoft’s Surface devices. It is also eating into Apple's market share. With Mac book Pro disappointing consumers, it is expected to give Apple a tough fight in 2017. (See Also: MSFT Stock: Is This Microsoft Corporation's (MSFT) Next Big Play?
While mobile has been a big failure for Microsoft, rumors are rife that one can still expect a surface mobile device in 2017 which it plans to make an ultimate mobile device. With its devices like Surface RT and its collaboration with Qualcomm (NASDAQ:QCOM) to deliver the full Windows 10 experience on devices running on Snapdragon mobile chips, it can really change the dynamics of the PC industry in 2017. It can reenergize its sluggish PC segment.
In 2016 Microsoft has placed a number of risky alternate bets. Some of these bets are Microsoft joining the Linux Foundation in November, launching a collaboration tool "Teams" to compete with Slack, opening up its virtual assistant "Cortana" to third-party developers. It also dived into AI and deep learning. While Microsoft’s alternative bets seem to be closer in line with its core mission, it still has to ensure it’s making the right ones and does not end up on the lines of Google's moonshots.
The gaming division which reported a revenue decline of 5% last quarter could be in for an exciting run in 2017 with its Xbox Scorpio scheduled for release in 2017. It is presently the no 2 in gaming console market. AR/VR could be unlikely growth catalysts for Microsoft with its HoloLens device and booming VR gaming market.
Putting it all Together
On valuation terms, Microsoft is trading at 30 times earnings, marginally above the industry average of 29 for business software companies. It is not that expensive given its overall growth potential and alternative bets. It is an exciting phase for Microsoft Corporation as well as MSFT stock. Now the company has to nail it down with its execution in all its major segments. 2017 could be the year where Microsoft stock may reach new highs. In all, Microsoft stock could be a safe long-term bet, with any pullbacks a good buying opportunity.
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