Almost three weeks ago, I penned an article that I thought Microsoft (MSFT) was ready to make a move upward. At the time, the shares were under $30 but had just crossed over their 200 day moving average for the first time since the fourth quarter of 2012. Since then the stock has indeed moved up to $33 a share. However, I believe the shares are in the middle of a breakout and still have further to climb. Some of the main reasons I believe this to be so are the following:
- The stock just hit a five year high and Mr. Softie is starting to get more positive play on financial outlets like CNBC.
- Apple's (AAPL) recently announced massive $60B stock repurchase plan and 15% dividend hike has moved its shares up substantially. It has also heightened speculation and pressure for Microsoft to do something with its approximate $70B cash/short-term marketable securities hoard. At a minimum I would expect a significant dividend payout raise by the end of summer.
- Microsoft has made some nice progress on some of its businesses outside of its core Office and Windows software.
- Windows Azure software and related programs have surpassed $1 billion in annual sales for the first time. Revenue is up 48% Y/Y and now has about 20% of the market. Gartner estimates that sales of infrastructure services like Azure will surge by an average of 38 percent annually to $30.6 billion by 2017 from $6.17 billion last year. Microsoft has about 20% of the market currently but is gaining share.
- Microsoft 365, another "cloud" offering, is also making progress and recently hit a $1B annual run rate.
- Its new Xbox console will be announced in late May. It is the first new platform in a space Microsoft is the market leader in within years.
- Between Apple's stock buyback inspired surge and the Procter & Gamble's (PG) recent slide after a disappointing revenue forecast, the technology sector is showing legs and easily outperforming the overall market and crushing Consumer Staples; which until recently was a market leader (See Chart). Look for this outperformance to continue.
4 quick other reasons to see value in MSFT at $33 a share:
- The shares yield 2.8% and should pay over 3% after the next dividend hike projected this summer.
- Even after its recent move, MSFT is selling near the bottom of its five year valuation range based on P/E, P/CF, P/S and P/B.
- If its $70B of net cash is accounted for, MSFT sells at less than 8x forward earnings.
- The company produces approximately $8B of operating cash flow a quarter, has one of four AAA rated balance sheets in the S&P 500 and is growing revenues near 8% annually.