Opinion: Here’s why Microsoft stock is better than you think

Of course, a sub-5% growth rate in sales of its Windows and server software business is down from previous quarters, and there are hints of serious problems in Microsoft’s core business. Additionally, a disappointing forecast for the rest of the year shows that issues will continue to plague the tech giant’s income statement for some time to come.

But a sharp drop within trading days after the report seemed far too harsh a reaction given some of the other encouraging things going on at Microsoft.

Here’s why the stock is still a buy right now, even with the drop after earnings and even though the Nasdaq COMP,
-0.72%
is at its highest level since the dot-com era:

1. Stocks rebound: The first notable indicator is the Microsoft stock price. While the stock fell around 15% after earnings from around $47 to around $40 per share as of January 30, it is already back around $44 after a strong run in recent sessions. . It’s not back to normal yet, but it’s a good sign that the initial downward momentum was short-lived and the negativity is fading.

2. Overall earnings weren’t so bad: Overall, Microsoft’s earnings were in line — revenue of $26.5 billion beat expectations of $26.3 billion and was up 8% from a year earlier. Earnings of 71 cents were down slightly year-over-year, largely due to restructuring charges and foreign exchange headwinds, but still hit target. It doesn’t look like an impending disaster, although the details of Windows’ main activity were scant.

3. The cloud keeps its promises: While the bears have focused on key Windows challenges, particularly in Asia, there are some promising details about Microsoft’s cloud software business. Consider that while its commercial segment revenue grew only 5%, commercial cloud revenue more than doubled to an annualized run rate of $5.5 billion. It’s still not quite the cash cow that Microsoft would like it to be, but a promising long-term sign as the company continues to focus on subscription-based cloud platforms including Azure and Office. 365.

4. Don’t mock Surface: Of course, the iPad from Apple Inc. AAPL,
-0.09%
is still the gold standard for tablets. But the iPad saw a steep 22% drop in revenue last quarter as Apple moved away from its tablet lineup and into larger iPhones, while Microsoft’s Surface saw sales growth of 24%. Granted, Microsoft is coming from a smaller base as Surface only saw $1.1 billion in total sales compared to nearly $9 billion for the iPad. But if this trend continues, it could mean a big mobile hardware business for Microsoft in a year or two, even if it stays behind Apple.

5. Dividends and redemptions: Microsoft spent more than $2 billion on stock buybacks last quarter and reaffirmed its intention to complete an existing $40 billion buyback plan by December 31, 2016. There are currently approximately 8.2 billion basic shares of Microsoft stock, up from 8.3 billion at the end of 2013 and nearly 8.4 billion at the end of 2012. Additionally, Microsoft offers a dividend yield of 2.8% which is very durable and ripe for increases to around 40% in profits. This is a company that takes returning capital to long-term shareholders seriously.

6. Attractive valuation: After this recent pullback, Microsoft is trading at a forward price-to-earnings ratio of just under 15. Not only is that much cheaper than tech stocks in general, but it’s significantly lower than the multiple of around 17.6 of S&P 500 SPX earnings,
-0.75%.

7. Optimism Windows 10 and PC: Many investors are looking forward to the highly anticipated release of Windows 10 as an indicator of things to come. And after the recent earnings report, the pressure is on for Windows 10 to prove itself. Fortunately, new data from IDC and Gartner are encouraging as they both point to stronger than expected PC sales after a soft holiday quarter – with Gartner actually reporting a gain instead of an expected decline. This bodes well for Windows licensing for this all-important launch.

Finally, remember that Wall Street reacted so negatively after lackluster results because optimism has been strong for the last year or so; Microsoft stock nearly doubled between early 2013 and Thanksgiving 2014.

This is despite the company neck and neck with an ambitious restructuring plan announced in 2013 that included the departure of CEO Steve Ballmer and admitted shortcomings in its approach to mobile and post-PC technology options.

Microsoft managed nearly 12% revenue growth in fiscal year 2014, but that’s partly because the tech giant stopped supporting the legacy Windows XP operating system and suffered a one-time increase in some forced upgrades.

The future won’t be so easy – with more bumps along the way. But based on the details highlighted here, the future is bright for Microsoft and its patient investors.