MSFT Stock: Should You Buy Microsoft Corporation (MSFT) Stock Going Into 2017?

Microsoft stock is trading near its all time high price.

Redmond, Washington-based tech giant Microsoft (NSDQ:MSFT) may not be one of the exciting names in today's stock markets. Yet, MSFT stock is up 12.06% YTD, also had an impressive last quarter earnings and the stock is currently trading at an earnings multiple of 29. Satya Nadella wants to turn the PC-centric company into one focussed on the promise of cloud computing. The company has moved its focus from PCs to cloud computing, Enterprise SaaS and innovative hardware (Surface series) to name a few. Can 2017 be Microsoft's year? Should it be on your buy list heading into 2017? Let's take a closer look.

How Microsoft has Fared in 2016

The biggest positives for Microsoft Corporation in 2016 would be its triple digit (113% Azure revenue growth) cloud revenue growth and it overtaking salesforce (NYSE:CRM) to become the overall enterprise SaaS market leader. Also, Office 365 increased its customer base to 23.1 M and Dynamics CRM online seat additions, enterprise mobility customers nearly doubled year over year. Surface series revenues growing by 9% ($3.81 B in profit) in the latest quarter can also be counted as a positive. Microsoft's commercial cloud has also touched an impressive annualized run rate of $12.1 B.

The PC division reported a 2% drop in revenues last quarter. The sluggish PC demand has hit Microsoft heavily since this segment contributes a large chunk of its revenues. Xbox segment along with its other acquisition Minecraft have been growing at a decent enough rate. The biggest announcement though was the $196 a share full cash acquisition of LinkedIn for $26.1 B. Though, Microsoft does not have a good track record with large acquisitions, take the Nokia deal for example, we need to wait and watch how things will pan out with the LinkedIn acquisition.

Microsoft stock has risen 12.06% YTD, but it has not been a smooth sailing for it in 2016. It had dropped to below $50 levels many times due to events such as Brexit. However, Microsoft stock has something that only very few names have, the ability to return value consistently in long term to investors. Microsoft had announced $40 B stock buyback as well as a 2.7% dividend hike recently. Not every company is in a position to increase dividends and do stock buybacks on a regular basis.

Recent Developments

Microsoft recently announced a string of partnerships and plans to reignite the growth in its sluggish PC segment. Its Project Evo, a collaboration with Intel (NSDQ:INTC) to develop the next generation of PCs focussed on mixed reality (AR), AI, gaming and security, was one of the major announcements. It also has submitted HoloLens (VR headset) for governmental approval in China and is adding 3Glasses to its list of headset developers that already includes Acer, ASUS, Dell, HP and Lenovo. By these moves, it is trying to be a major player in the rapidly growing multi-billion dollar AR/VR industry.

It is also partnering with Qualcomm (NSDQ:QCOM) to deliver the full Windows 10 experience to computers running on Snapdragon ARM chips. Microsoft calls these, "cellular PCs", since they feature cellular connectivity. To bring Windows 10 to devices running chips based on ARM processors is huge, as the so called cellular PCs could easily branch into smartphones, providing Microsoft a re-entry into the smartphone market. Also to deliver full blown Windows 10 PC experience through Windows on ARM has the potential to revolutionize ultraportable Windows laptops. This may be the next big step in windows evolution.

Microsoft has also joined the open innovation bandwagon by joining Linux foundation and welcoming Google to the .NET community. This is a great step in the direction towards a wider ecosystem of sorts. Microsoft has also released the world’s most advanced container service via Windows Server 2016. This will allow Microsoft not to lose ground to AWS and offer better hybrid cloud solutions, for which AWS has tied up with VMware.

The biggest development though is the official closing of Microsoft's $26.2 B LinkedIn acquisition. Nadella referred this as Microsoft's Instagram. Whether they can replicate Facebook's Instagram success, which is now worth an estimated $50B, with LinkedIn remains to be seen.

The Road Ahead

Microsoft stock is presently trading near its all time high level. Also valuation wise, it is still very expensive trading at high earnings multiples of 29. However, the thing with MSFT is despite being a four-decade-old company, it is showing strong growth. Microsoft’s adjusted revenues increased 5% YoY in constant currency terms in the September quarter,  adjusted earnings came in at $0.76 per share, a 13% improvement from the year-ago period.

On valuation terms, it looks overpriced due to its aggressive valuation. Of late Microsoft has a lot of things going for it, but the cloud and enterprise SaaS are the main drivers. The year ahead has lots of things well placed for it. It all depends on how Microsoft executes its plans. The performance ahead would largely be dependent on its cloud and enterprise offerings performance. It can give surprises if it is able to reignite the sluggish PC segment, with growing hardware business in Xbox and surface series, especially, giving a boost.

The benefits from the LinkedIn acquisition will be keenly awaited. There are many opinions both for and against the deal, but if it can become Microsoft's Instagram then it would be really great news for MSFT stock. A lot is riding on it for Microsoft.

There are also substantial risks which Microsoft faces going forward in 2017. The first being fierce competition in every field where Microsoft has its footprints, whether in cloud, PC OS or enterprise SaaS etc. The second being is the failure of any of its big bets such as the LinkedIn acquisition, or any new product like the next generation PCs in extended reality which Microsoft is presently working. Currency headwinds may also prove to be a drag on earnings as Microsoft has a lot of exposure to the overseas market.

Summing It Up

Under the leadership of CEO Satya Nadella, Microsoft continues to be among the most forward-looking and pragmatic tech companies lately. He has been bullish on Cloud, AR/VR and AI (Cortana). The year ahead would depend on how Microsoft's big bets play out. With its cloud revenues in top gear and its new big bets well positioned to take off, Microsoft stock is a stable and safe dividend stock, also backed by strong fundamentals and exceptionally strong balance sheet. It is also a good investment for investors looking for reasonable capital appreciation in the long-term, so any pullback in the near term may be a good buying opportunity.

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