Entering text into the input field will update the search result below

Microsoft: Buy The Dip?


  • With valuation off its peak, bargain hunters will likely appreciate MSFT's 6% pullback in the past month.
  • In my view, Microsoft continues to do a great job at transitioning its business model from legacy to high-growth initiatives.
  • Yet, I continue to find the stock too pricey to qualify as an enticing buy-on-weakness play.

I have been a long-time skeptic of Microsoft (NASDAQ:MSFT). That's not to say that I don't appreciate the company's prospects in intelligent cloud or the momentum in cloud-based CRM and ERP solutions. But I haven't been quite able to digest the stock's valuation well. Ever since I published my first article on MSFT, in 3Q16, forward P/E has climbed from 18.5x to nearly 24x about 6 weeks ago.

Credit: Tech Central

Bargain hunters, however, will likely appreciate the stock's 6% pullback in the past 30 days. Forward P/E has retreated to 20.6x (see graph below) to trade at the same earnings multiple of January 2016. The question in my mind: Is now a good time to jump in and scoop up a few shares of MSFT on the dip?


MSFT PE Ratio (Forward) data by YCharts

In my view, Microsoft continues to do a great job at transitioning its business model from legacy (i.e., personal computing, software licenses) to high-growth initiatives (i.e., cloud platform and infrastructure, cloud-based applications). The slowdown in the growth pace of Azure has been playing out as I had previously expected (see chart below), as the platform becomes a more meaningful revenue generator and pricing pressure from giant Amazon (AMZN) is unlikely to subside.

Yet, Azure continues to charge ahead at a near-triple digit pace. With revenues representing what I estimate to be only about 3% of the company's total, I believe cloud still has quite a bit of room to run. Even if Azure continues to be a small piece of Microsoft's portfolio, I estimate that the YOY increase in sales will represent nearly half of the company's total top-line growth in the next few quarters.

Source: DM Martins Research, using data from company's reports

The momentum in productivity and business processes, with Dynamics, Office and LinkedIn

This article was written by

DM Martins Research profile picture
Tracking Economic Inflection Points To Guide Your Asset Allocation Strategy

Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.

- - -

Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.

He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.

- - -

On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.

DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.