Though a company like Microsoft Corp. (MSFT – Free Microsoft Stock Report) should have no need for introduction at this stage in its lifespan, arguably one of the most pivotal and revolutionary technology companies in contemporary history, the world’s largest independent software maker does not appear to get the critical acclaim and the headlines that it did say 15 years ago. Indeed, many technology investors have cycled into trendier names like Apple Inc. (AAPL – Free Apple Stock Report) and Alphabet Inc. (GOOG), undoubtedly the two most referenced and celebrated players in the current market.
Nonetheless, it is virtually irrefutable that Microsoft has all but dominated the software and personal computer operating systems markets for about three decades. Since its inception in 1975, the company’s record of entrepreneurial leadership and shrewd business strategies, coupled with its effective product-integration model and keen ability to build successful partnerships, has truly galvanized its iconic and indelible position among the technology industry’s elite, albeit to far less resounding applause than its aforementioned rivals over the past 10 years. However, the recent stock price performance has not been particularly newsworthy, as MSFT has been essentially range-bound between $50 and $56 over the past several quarters. Moreover, the $56 resistance level has been evident for about 2 years now, as demonstrated in the Graph and Top Label sections of the Value Line page. Many investors may wonder what has been holding MSFT shares back.
A closer look at these sections also reveals that the stock enjoyed a strong growth spurt from the beginning of 2013 through 2014. During this period, the emergence of the company’s Surface Pro tablet/laptop hybrid, well-received rollout of Windows 8.1, and its strong foray into cloud computing likely revived share-price gains. Since the aforementioned price ceiling manifested in 2015, the market may well be pondering if and when the next successful round of rollouts will help MSFT to break through again.
This prompts us to scan over to the Ranks box, where we see that Microsoft shares have a Timeliness rank of 2 (Above Average), which indicates that we expect the stock to outpace the broader market averages over the next 6 to 12 months. Given this implied momentum factor, it seems prudent to examine some of the potential drivers that would fuel this impetus. One such element is Microsoft’s industry. Indeed, software platforms today are highly competitive. This difference results from the different mechanics of platform markets compared with traditional ones. Platforms don’t compete based on their assets but rather based on their networks of users. Users today can migrate rapidly, as they are more attached to the value the platform delivers, rather than the assets it owns. As a result, even when a platform dominates a specific business segment, it remains quite vulnerable to competitors’ platforms that have similar user bases. This process of platforms competing across industries is surprisingly common. For example, back when Amazon.com (AMZN) essentially spawned the e-book industry in the U.S., their dominance in this arena seemed immovable. Yet, as the market matured, both Google and Apple have moved from adjacent industries and become formidable adversaries. Similarly, Alibaba (BABA) used its meteoric rise to dominance in the global product marketplace to penetrate Baidu’s (BIDU) leading market share in product search. Hence, the low barriers to entry make it an inherently difficult sector to remain atop. These considerations notwithstanding, Microsoft has widely bucked that trend and maintained a superior position in its primary operating system markets.
Still, as this landscape is in constant flux, the emergence of mobile devices has left Microsoft at a considerable disadvantage to Google’s Android and Apple’s iPhone and iPad platforms. In fact, though it may be hard to fathom at this stage, the consensus agrees that the aforementioned entrants were actually a response to fear of Microsoft’s rising supremacy in mobile in the early 2000’s. So the question remains, what are the would-be catalysts that could catapult the stock price in the coming years and beyond?
The Commentary piece on our page goes into greater depth on this subject, as analyst Charles Clark notes that, “Cloud computing and cloud services are tremendous opportunities for Microsoft.” Mr. Clark goes on to say of the company’s Windows 10 operating system that, “the broader strategy behind the new system—aimed at countering the general decline in the PC market — seems to be taking hold, as it is finding its way into a wider range of products, and application developers seem to be showing new interest in Microsoft.” Moreover, while smaller competitors have all but given up going head to head with Apple, Microsoft still has the clout to take on its rival tech behemoth. With that, much of what goes into this stature is what investors should find compelling about the company’s long-term investment appeal.
In fact, the Capital Structure box on the left of the page indicates the sheer size and scope of its operations, which give MSFT a leg up on most of its competitors and a dog in the fight against AAPL. Also, for such a huge corporation, its debt burden is a pretty manageable 35% of total capital. Furthermore, shifting to the Current Position box just below, shows that the company closed out fiscal 2015 with nearly $97 billion in cash. A coffer this substantial opens up considerable windows of opportunity and gives Microsoft superior flexibility to make strategic moves that some peers could never undertake. Along with a much larger number of potential acquisitions on the table, other levers (say share repurchases) can be pushed to support the stock, while the dividend is fully supported. That being said, Microsoft is not what most would call aggressive on the acquisition front. Nonetheless, our projections have the dividend yield remaining just under 3.0% out to late decade and we do not view cash generation as an issue over that pull. Too, financials are exemplary, as noted by our A++ grade for Financial Strength and Safety of 1 (Highest). These designations can be found in the Ratings box in the lower right hand corner and in our Ranks Box under the Timeliness rank, respectively.
Furthermore, a quick look at the Annual Rates of Change box displays Microsoft’s solid performance growth rates over the five- and 10-year time horizons. The historical financial data in the Statistical Array reveals that, with the exception of 2009, the company’s revenue, net profits, and cash flow per share have all risen every year since 2002. Indeed, these factors confirm that, even at its highest P/E ratio in a number of years, Microsoft shares still appear to be a worthwhile investment, particularly over the long haul. All told, we view this equity as a solid, safe choice for momentum-seeking, as well as risk-averse buy-and-hold investors.