5 reasons to buy Microsoft stocks

Microsoft (NASDAQ:MSFT) the stock traded higher on Thursday morning after the tech giant reported second-quarter earnings and earnings. But as impressive as Microsoft’s quarterly profits and Azure’s revenue growth figures are, Microsoft’s bullish case goes well beyond a quarter.

Here are five reasons to buy Microsoft stock.

1. Cloud services

Microsoft reported Azure revenue growth of 62% in the second quarter. This solid cloud revenue growth helped propel Microsoft’s overall revenue growth rate of 14%. It’s not just that Azure’s high margin revenue is a higher percentage of Microsoft’s overall revenue each quarter. Microsoft’s Azure margins actually increase over time. Bank of America Analyst Kash Rangan estimates that two-thirds of Microsoft’s total addressable market over the next few years is Azure opportunities, and that TAM is less than 3% penetrated at this point.

2. Commercial office

Microsoft Office is certainly far from new. However, Microsoft has adapted its commercial office solutions products to the modern subscription-based, cloud-centric software model.

Joel litman, chief investment strategist at Altimetry and Valens Research, says Microsoft is following the path set by Adobe (NASDAQ:ADBE). Adobe has shifted to a subscription-based business model and profitability and the company’s share price have skyrocketed.

“Microsoft is seeing exactly the same inflection as Adobe, but the market is not reacting as if it has seen this playbook before. Microsoft’s stock is exactly where Adobe’s was, at the same point in its journey, ”Litman wrote in November.

Since then, Microsoft stock has risen a further 15.4%.

3. Game

Microsoft has been in the gaming business since 2001 when it released the first generation Xbox. Like the software industry, gaming has evolved tremendously since 2001. Microsoft has shown flexibility and adaptability. Microsoft is launching its next-gen Xbox in time for the 2020 holiday season. However, its Xbox Live subscription online gaming platform is more focused on online gaming.

Microsoft was early in the game recognizing that hardware was not an opportunity for growth in games. Since 2014, Microsoft has bought six game studios and invested in services such as Game Pass, Xbox Play Anywhere, and Xbox Live Gold. He also caused a stir with his Mixer streaming platform, poaching top players Tyler “Ninja” Blevins and Mike “Shroud” Grzesiek from Twitch.

4. LinkedIn

Most people know LinkedIn as a professional social media platform. However, since acquiring the company in 2016, Microsoft has transformed LinkedIn from a social media platform into a business-to-business marketing juggernaut. Rangan says two-thirds of LinkedIn’s revenue in 2016 came from its talent solutions (recruiting) business. Today, Microsoft is focusing on its marketing solutions business, which accounted for approximately 17% of fiscal 2019 revenue. Over time, Rangan says the increased integration with Microsoft Dynamics 365 and Office 365 will make LinkedIn Sales Manager the main growth driver of the platform.

5. Github

Microsoft acquired Github in 2018 for $ 7.5 billion. Github provides hosting for software development version control. Since 2012, Github has grown its user base at a compound annual rate of 50%. Rangan estimates that the total addressable market for Github will be worth around $ 6 billion by fiscal 2025. He also says that about 52% of Fortune 50 companies currently use the enterprise level of Github and pay $ 21 per user per user. month.

When Microsoft first acquired Github, CEO Satya Nadella said that software engineer roles in companies outside of the tech sector were growing 25% faster than roles within the tech industry. . “As every business becomes a digital business, value creation and growth across all industries will increasingly be determined by developer choices,” said Nadella.

How to play Microsoft Stock

Rangan says Microsoft is a one-time investment because of the five growth themes mentioned above. In addition, the stock is still trading at a reasonable valuation and benefits from the strong trading margins inherited from the company.

“As we reach an inflection point in Azure and Com Cloud is driving the majority of [revenues and profits], we believe that MSFT may re-evaluate to the upside as EPS accelerates to 17% y / y FY21E with a [operating margin] leverage given the end of the cloud investment cycle (ADBE trading at 35x CY20 P / E and FY20 EPS growth in the middle of 20%), ”Rangan said.

Anthony Denier, CEO of Webull, said this week’s profit pace is another example of Microsoft’s under-promise and over-delivery.

“Since the software giant decided to focus on Azure rather than its old Windows operating system, it has taken off,” says Denier.

The same can be said of Microsoft’s stock. Over the past three years, Microsoft stock has risen 162%, topping all so-called FANG stocks. Yet even after the strong advance, the above five sources of growth, coupled with Microsoft’s reasonable valuation, mean there are still plenty of reasons to recover stocks.

At the time of this writing, Wayne Duggan does not hold any position in any of the aforementioned stocks.