Microsoft (NASDAQ:MSFT) stock saw a huge sell-off following the latest quarterly earnings release. After hitting a high of $50/share the stock has fallen by over 15% in the past few months. However, Microsoft stock analysis shows that the fundamentals of the company are as strong as ever and the firm is steadily moving into future growth areas. The appointment of Satya Nadella as the new CEO of the firm has led to several changes in the strategic plan with the firm moving aggressively into areas like Cloud computing and mobile devices. The company is making a good progress in its key areas and the stock should reflect this growth in 2015.
Cloud Computing and Cash
A lot of noise has been made about cloud computing, though this area is yet to show a good business model for companies. This high stakes game includes players like Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOGL), IBM (NYSE:IBM), Hewlett-Packard Company (NYSE:HPQ) and Microsoft. The huge competition has led to regular price cuts in these services while heavy investments are made, which is a pre-requisite in this segment. In the end, the laurels will be taken by the company which has the required technology as well as cash to survive this race. Microsoft, with over $100 billion in cash and debt of less than $30 billion, has the resources to come out as a potential winner.
Microsoft's cloud computing segment registered strong growth in cloud computing throughout 2014, the highlight being an eye popping 114% year-on-year growth in the latest quarter with annualized revenue of $5.5 billion. It has fantastic products in Azure, Office 365 and Dynamics CRM online. As all the firms are investing at full steam within this segment, there will be negative effects on the short term profit margins. However, the market should pay a closer attention to the market share grabbed by the players. And on this metric, Microsoft should be the numero uno and should be able to topple Amazon, the current market leader, within a short time.
Fig: Growth of the big players within cloud computing. Microsoft is leading the pack in terms of growth and should be a good challenger to Amazon’s position soon.
Mobile devices and Hardware
Another major area of investment for Microsoft has been in mobile devices. Lumia devices have picked up pace, although from a lower base. Over 10.5 million devices were sold bringing in $2.3 billion in revenues in Q2 2015 (December 2015 ending quarter). Success of Surface Pro 3 also helped the hardware segment and resulted in a respectable 24% increment in revenue. This summer will see the launch of Surface Pro 4, which has already created good hype and should further lead Microsoft into becoming its own OEM.
Current Valuation
Microsoft stock price gained 25% in 2014. However, Microsoft valuations continue to remain attractive with a current PE ratio of 17. Besides giving a good dividend yield of 2.95%, the firm has a massive $40 billion share buyback program in place, which will be completed by end of December 2016. This will provide additional cushion to the stock price. The markets could send the Microsoft stock soaring if it continues to provide good numbers on the newer frontiers of cloud computing and mobile.
Windows 10
Finally the bread and butter segment of Windows has not performed well with a 1% decline in Office sales in the latest quarter. With its new OS, Microsoft is looking to plug this decline. Windows 10 will provide a unified platform for all the products including PC, Windows Phone and Xbox one products. Even an above average acceptance from the customers can set the ball rolling for Microsoft across different categories. It will provide a good push to its Surface devices as well as give the required fillip to the mobile segment. This is quite an important launch for the firm and it will not leave any stone unturned to make sure that the product meets the expectations of its customers. A unified platform can also provide a long term moat for the firm leading the stock onto a bullish momentum.
On a Cautionary note
One of the major causes of worry for an investor in 2015 is the negative impact of currency fluctuations on the firm’s earnings. 2015 will see a major change in the currency movements when, after six long years of loose monetary policy, the Fed will likely hike the interest rates. On the other hand, the Eurozone is headed towards an American style of QE. This would lead to appreciation of the dollar and would hurt the export market for Microsoft and other major exporting firms. To be fair the firm does not have a control on these factors and the market should not punish the firm unduly due to these macro headwinds.
Conclusion
Other than minor hiccups the stock should provide robust returns in 2015. Increasing market share in the cloud and mobility space will be key to putting the stock on a bullish trend and the launch of new OS could be the final icing on the cake. The stock is still trading at reasonable valuations and the recent fall due to lower earnings figure has provided a good entry point for investors. It should be able to beat the market returns hands down, and give good returns to the investors.