After outperforming the broader markets in 2016, can MSFT stock continue its rally in 2017?
- Although Microsoft has significantly outperformed the market in the last few years, the MSFT stock price still has room to grow.
- Microsoft could gain market share and increase revenues in its gaming division by introducing virtual reality and augmented reality in gaming.
- Microsoft's Connected Vehicle strategy is very promising, and other car makers might follow Nissan, BMW, and Volvo who are using the strategy.
Microsoft Corporation's (NASDAQ:MSFT) stock has been an excellent investment in the last few years. In fact, in 2016, MSFT stock gained 12% while the S&P 500 Index increased by 9.5%, and the Nasdaq Composite Index rose by 7.5%. Moreover, since the beginning of 2012, MSFT stock has gained 139.4%, outperforming the S&P 500 Index, which has increased by 78% and the Nasdaq Composite Index, which has risen 106.6%.
What's more, the company generates strong cash flow and returns substantial capital to its shareholders through stock buybacks and increasing dividend payments. On September 20, 2016, the company announced an 8% raise in its quarterly dividend to $0.39, or $1.56 a year. The present annual dividend yield is at 2.51%, and the payout ratio is 69.3%. The annual rate of dividend growth over the past three years was very high at 16.1%, over the past five years was also very high at 17.6%, and over the last ten years was high at 15.2%. Also, in its fiscal year 2016, the company bought back $16 billion worth of stock and in the first fiscal quarter of 2017, it repurchased $4 billion worth of its shares. (See also: Microsoft Corporation: Is MSFT Stock A Better Buy Than AAPL Stock Now?)
As such, investors might wonder if it is not too late to buy Microsoft stock. As I see it, Microsoft has high growth prospects, and its shares could go much higher.
Microsoft’s Major Growth Drivers
The cloud computing revolution has opened high growth opportunities for the company. Microsoft’s Azure which has been operating since 2010 has become the second largest player in the cloud-based infrastructure as a service business behind the leader Amazon Web Services (AWS). In fact, Microsoft said that in its first quarter of fiscal 2017, Azure revenue increased 116% with Azure compute usage more than doubling compared to the same period a year ago. What's more, Microsoft’s Office 365 and the synergies expected from the $26.2B LinkedIn acquisition completed on December 8, 2016, are also key growth drivers for the company.
However, a new very promising growth driver could emerge from the company's gaming division using Virtual and Augmented Reality (VR and AR) in its video gaming console. Microsoft Xbox gaming console, which is the second most popular in the gaming market after Sony's PlayStation console, could gain market share and increase revenues in its gaming division by introducing Virtual and Augmented Reality in gaming. According to the research company IDC, the worldwide revenues for the virtual reality and augmented reality markets will increase to $162 billion in 2020 from $5.2 billion in 2016, an astounding average annual growth rate of 181% in this period. (See also: 3 Strengths That Make Microsoft Corporation (MSFT) Stock A Buy Now)
Microsoft at CES 2017
In the 2017 Consumer Electronics Show (CES) which took place in Las Vegas between January 5 to 8, several car makers emphasized the use of Microsoft's Connected Vehicle strategy. Microsoft's strategy is to connect cars to the company's cloud services like Azure and Office 365. In the show, Nissan CEO Carlos Ghosn reiterated the company's previous announced strategy to use Microsoft's cloud services for navigation, remote car monitoring, and predictive maintenance. According to Mr. Ghosn:
"On connected cars, which combine Nissan Intelligent Driving and Nissan Intelligent Integration, the Renault-Nissan Alliance is continuing its partnership with Microsoft to build the next generation of connected car technologies. The keynote included a demonstration of how Microsoft's personal assistant technology Cortana can make driving more efficient and seamless. Cortana is one of the technologies that the Alliance and Microsoft are exploring together."
Also at CES, BMW, the luxury vehicles company said that it would partner with Microsoft on Azure services for its connected cars. According to BMW:
Voice-controlled capabilities already offered by Microsoft Cortana on a home PC or smartphone could in the future also be available on board a BMW vehicle."
In addition, Volvo said that it would add Microsoft's Skype for Business applications to Volvo's new 90 Series cars. Volvo's agreement with Microsoft also covers the use of Cortana to add contextual insights and voice recognition to anticipate the needs of the drivers.
All these developments will benefit the company since other vehicle manufacturers, realizing the advantage of the use of Microsoft's Connected Vehicle strategy to drivers, will probably also partner with Microsoft to use the strategy in their new car production.
Although Microsoft has significantly outperformed the market in the last few years, in my opinion, the MSFT stock still has room to grow. Microsoft has strong growth drivers; the cloud computing revolution has opened high growth opportunities for the company, and it could gain market share and increase revenues in its gaming division by introducing virtual reality and augmented reality in gaming. Also, Microsoft's Connected Vehicle strategy is very promising, and other car makers might follow Nissan, BMW, and Volvo to use Microsoft's strategy in their new car production.
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