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Should You Buy Microsoft Stock?

Within a year in which the S&P 500 has ground sideways, Microsoft (MSFT) has silently been hitting new 52-week highs and is up close to 20 percent YTD.

Certainly, that is nothing compared to the Alphabet (GOOG, GOOGL) stock, which has increased by nearly half. However, Microsoft shares are hitting the pants off of Apple (AAPL) which has hardly increased by 5 percent in 2015.

The software giant is back and CEO Satya Nadella is directing MSFT in the right way with his “mobile first, cloud first” plan. However, has the Microsoft stock price lost touch with reality, with the MSFT stock now trading for 37 times earnings? In any case, this is a company whose ideal product, the Windows operating system is connected to a weakening PC market.


Microsoft Stock by the Numbers

While Microsoft  stock’s current price-to-earnings  percentage might look a little on the expensive side, which is partly due to the bath MSFT took in its fiscal fourth quarter. MSFT took a $7.5 billion writedown on its investment in Nokia, declining earnings for the quarter and for the whole year.

Looking next year’s anticipated earnings, Microsoft stock trades at a forward P/E ratio of 20. Even though that is not “cheap,” it’s in line with the forward P/E of 18 for the S&P 500.

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Income increase has been unsatisfactory over the past two quarter. However, this is in part due to MSFT’s transition to a subscription-based model.

For instance, Office users usually purchase a licensed copy on a single one-time payment. However, today, Office 365 users pay a low monthly subscription payment. The outcome is that present incomes seem lower,  even though the quality of returns has developed, as a subscription-based model creates regular, recurring payments. MSFT estimates that this will eventually bring in 80 percent more income per customer, although it will take time to completely work out. 

MSFT’s choice to provide Windows 10 away for free to existing Windows 7 and Windows 8 users has also taken its toll on income development. Although probably a smart change in the long run, because it would help to put the Windows 8 tragedy in the past, it still takes a bite of out today’s profits.

PC sales will also perhaps stage a modest recovery from their present declining levels as companies substitute old machines.

However, the great news for MSFT bulls is that Microsoft continues to change beyond the Windows platform, under Nadella. Along with Alphabet and Amazon, Microsoft  is emerging as a leader in cloud services. MSFT’s cloud-based Azure platform witnessed  its income upsurge by 135 percent last quarter. Incomes from MSFT’s Intelligent Cloud division, which stand at $5.9 billion last quarter, are rapidly catching up to its Productivity and Business Processes division. This unit earned $6.3 billion last quarter, which includes Microsoft Office.

Although Microsoft stock profits only 2.7 percent at recent prices, it has turned out to be something of a favorite among dividend investors due to MSFT’s great track record of increasing the dividend. Last September, MSFT declared a 16-percent dividend increase and the company has boosted its dividend at a 19-percent annual clip over the previous three years. Assuming that MSFT has almost $100 billion in cash and equivalents, chances are good that progress will continue.


Bottom Line for MSFT Stock

Despite its run up, is Microsoft stock still a buy?

Definitely, the risk in having MSFT at this point is purely the danger of a wide-ranging market sell-off. And if this is something that worries you, consider putting in a stop loss.

But then again, since that Microsoft’s reinvention is still in the initial stages, investors should not be in a hurry to sell.

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