Should you buy Microsoft shares? Here are the key figures to look at now

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If you are planning to buy Microsoft Corp. stock, or if you already own stock, you need to understand the key metrics and issues with the business.

The numbers below show how Microsoft MSFT,
+ 1.51%
compares to its competition and where its strengths and weaknesses lie. Keep in mind that no two businesses are the same – not even competitors compete in all areas. Investors need to do their own research to make informed long-term decisions.

Key dynamics

Since Satya Nadella took over as CEO in February 2014 and radically changed the leadership of this software giant co-founded by Bill Gates, Microsoft has become a key player in cloud computing. This decision has largely paid off for investors. The stock has risen 680% since then including dividends, more than four times the return of the S&P 500 SPX Index,
+ 0.41%.

There could be more outperformance ahead for the stock as growth remains very robust, despite the size of this company. Microsoft has a market capitalization of $ 1.9 trillion. Often times, companies of this size struggle to grow rapidly just because they are so large. Still, the 46-year-old software company saw sales growth of 16.7% in the fourth quarter.

Server products and cloud offerings from Microsoft, a $ 41.4 billion company last year, rose 25.8% in the fourth quarter. The most popular product line is Azure cloud services. Customers love Azure because it helps them become more productive and competitive. They will therefore continue to register and expand their use once they log in.

“We are witnessing the dawn of a second wave of digital transformation that is sweeping through every business and industry,” Nadella said.

Already at $ 29 billion per year, Azure sales are growing by 50% per year, estimates Kash Rangan, analyst at Goldman Sachs. (Microsoft does not detail the numbers or offer projections for Azure.) Microsoft also offers artificial intelligence software; Microsoft Office suite products such as Word, XL and Outlook; popular video game equipment; the professional networking site LinkedIn; and, of course, Windows. You can see that four of these industries are growing by 10% or more, but Windows and research are slow.

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Geographical scope

Microsoft does half of its business outside of the United States. This is a good thing for investors, because in times of robust and synchronized global growth like the one we are seeing now, emerging economies tend to grow much faster than the United States.

“We are investing to offer our cloud services to more customers, [incuding] seven new data center regions in Asia, Europe and Latin America, ”Nadella announced.

One vulnerability is that a stronger dollar would hurt Microsoft, as it would reduce the value of foreign revenue when it was exchanged for greenbacks.

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Profitability

Overall, Microsoft is not growing as fast as many of its competitors. But the popularity of its cloud products and services supports higher profit margins. For investors, this offsets the relatively slower growth in sales.

“Microsoft has taken the lead with a state-of-the-art cloud platform,” said Mark Murphy, analyst at JP Morgan.

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Cash and cash flow

Companies with lots of liquidity and strong cash flow have an advantage, as it helps them avoid resorting to banks or dilutive capital increases. It puts them in control of their own destiny. Microsoft uses its cash to buy back stocks and pay a dividend with a return of 0.87%. But it’s also leveraging the $ 132 billion in cash to grow through acquisitions.

For example, Microsoft recently announced the purchase of Nuance Communications, giving Microsoft strong forays into the healthcare industry. Nuance offers artificial intelligence (AI) used in the industry to analyze conversations and help providers communicate with patients.

The risk is that Microsoft will make bad acquisitions and waste money, which could otherwise have been better spent by returning it to shareholders. For example, Microsoft has blundered in its purchases of Nokia’s mobile phone business and digital marketing services company aQuantive. This is why many investors prefer that companies simply return money to shareholders through dividends and buybacks, rather than risk wasting it.

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Pit

Investing Big Warren Buffett loves companies with protective moats. Moats create pricing power and prevent competitors from winning customers. Microsoft enjoys a wide gap for the following reasons, says Dan Romanoff of Morningstar, who like Buffett emphasizes gaps when analyzing companies.

First of all, a lot of Microsoft business software requires a pretty steep learning curve, so customers get stuck in products. In addition, the exchange of software is disruptive for a business. This creates the costs of change. Second, Microsoft products and services benefit from network effects. As more and more people use Azure, Microsoft Office, LinkedIn, etc., these offers become more valuable to everyone as they connect more people with each other. Network effects create value for customers, discouraging them from getting off the ship.

Valuation and performance of shares

Microsoft stock has outperformed the stocks of several competitors over the past five years, but it still has a relatively low price-to-earnings (P / E) ratio compared to them. Keep in mind that relatively new companies like CrowdStrike CRWD,
+1.34%
may have deceptively high P / E ratios because they are still reinvesting a lot in their own companies, diverting cash from earnings per share.

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Wall Street’s view

Here’s a summary of the opinions of Wall Street analysts surveyed by FactSet:

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Important appointments
  • April 27 – Microsoft reports first quarter results.

  • May 19 – Ex-dividend date.

  • July 20 – Microsoft reports second quarter results.

With a report by Philip van Doorn.

Michael Brush is a columnist for MarketWatch. At the time of publication, he had no position in the stocks mentioned in this column. Brush suggested MSFT, AMZN, GOOGL and CRM in his stock newsletter, Refresh actions. Follow him on Twitter @mbrushstocks.


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