After an explosive start to January, almost every stock suffered as the broader market pulled back. This gave investors a chance to buy stocks like Apple Inc. (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT). However, not everyone was able to pull the trigger and scoop up Microsoft stock or others.
Without a healthy level of volatility, opportunity disappears. Take MSFT stock for example. Say shares were destined to top $95. Over the past year, one of its most “violent” corrections took it from $72 to $68 over a month-long span. This paltry 5.5% correction was about the best chance investors had to scoop up shares on a so-called pull back.
That’s the tough part. Without meaningful corrections in the market, many investors are missing their buying opportunities. When we finally do get a correction, it is frighteningly fast. Like a 10% drawdown in the S&P 500 in just 10 days. That’s an extreme move even in a bear market, let alone a raging bull market.
So with that said, what do we think of Microsoft stock?
Why We Like Microsoft Stock
On January 31, we went against the grain and said it was time to take profits in Microsoft stock. Although we found it prudent to take some profit off the table in MSFT stock, we also realize that it’s a great company. Microsoft may not have growth like Amazon.com, Inc. (NASDAQ:AMZN) or Netflix, Inc. (NASDAQ:NFLX). But that doesn’t mean it’s not worth a deeper look.
For a long time, investors haven’t paid much attention to International Business Machines Corp. (NYSE:IBM) and some of its fastest-growing revenue segments. That’s because its legacy revenues were still in decline and were still a majority of its overall revenue. But as its new segments keep powering out strong growth, all of a sudden they start making up a larger piece of the pie. Thus, the stock gets more attractive.
Microsoft is in a similar (albeit much better) boat. Once living solely off Windows, CEO Satya Nadella has MSFT stock on the right path. Its focus on cloud is perhaps the most notable. Last quarter, Azure clocked 98% year-over-year growth. For those keeping track at home, that’s 10 straight quarters of 90% growth for Azure.
We’ve seen how important the cloud is and we know how important artificial intelligence will be. MSFT has already said it will focus on the latter, but right now it’s all about the former. Cloud growth has been driving AMZN, GOOGL, Alibaba Group Holding Ltd (NYSE:BABA), Salesforce.com, Inc. (NASDAQ:CRM) and countless others higher.
As Azure and other growth segments for Microsoft continue to grow at a rapid pace, they will make up a larger portion of revenue. Then, as these segments gain size, overall revenue growth should accelerate. That’s where the opportunity is in MSFT stock price.
Valuing Microsoft Stock
While Microsoft stock may not sport the same growth profile as the stocks above, it does have a reasonable valuation. For 2018, analysts are forecasting earnings and sales growth of about 11% each. For fiscal 2019, those estimates fall to 7.7% and 8.5%, respectively.
We’re paying about 25 times this year’s earnings and 23 times fiscal 2019 estimates. Keep in mind we’re already halfway through fiscal 2018.
Does it seem expensive? If this were a consumer packaged goods company, I’d say yes. But for a high quality company like Microsoft, it’s not so bad. It’s a leading cloud player — just behind AMZN and ahead of GOOGL — with the lowest valuation among its cloud-based peers. Plus, don’t forget all of the cash it now has, thanks to the new tax laws. It can boost its dividend, buyback more stock or make acquisitions to fuel growth.
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What else is there? Its segment targeting commercial and business customers continues to gain traction too, growing 24% year-over-year last quarter. As the economy improves, I would think this segment maintains momentum.
Additionally, we’ve all seen how well gaming has been treating Nvidia Corporation (NASDAQ:NVDA), Activision Blizzard, Inc. (NASDAQ:ATVI) and others. Well, Microsoft is the maker of Xbox and should continue enjoying secular tailwinds here as well.
In all, Microsoft is a name we want to own rather than not. Another dip to the mid-$80s should be bought by investors. (See note on chart).
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a position in AAPL, CRM and NVDA.
