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Microsoft Is On Its Way To $50

As first seen at TheStreet.com

In my last Microsoft MSFT piece, I focused on its dividend bull thesis. I love Microsoft as a long-term dividend play, but that’s only part of my attraction to the software maker.

We shouldn’t, but if we discount the company’s dividend and focus on capital appreciation; the result remains the same; Microsoft is a strong buy. In fact, I think Microsoft will reach $50 and the company’s value overshadows other tech giants Google (GOOG), Apple (AAPL) and Amazon (AMZN)

Microsoft dominates the PC and laptop market. It’s off to a slow start in tablets, but we’ve seen this movie before. Internet explorer was slow at first and gained a leadership position. Weakness in the PC market has wrongly led many investors to believe the company is past its prime.

The fact is, despite a relatively modest increase in share price, revenue and profits continue to grow and during the past 10 years, the share price failed to rise proportionately.  In other words, Microsoft is a better value now compared to 2004, not long after the dot com bust.

Indian born and U.S. educated Satya Nadella, the new chief, adds renewed vigor for a company that changes CEOs less than once a decade. Previously, Nadella led Microsoft Cloud and Enterprise group.

Nadella’s assent doesn’t come as good news for Amazon (AMZN). Amazon and Microsoft (MSFT) share the common characteristic of having multiple and distinct product offerings and revenue streams. Concerning the most to Amazon is the two tech overlap the most within cloud computing services. Amazon is the number one provider, called Amazon web services (AWS), and Microsoft’s Azure is number two.

It’s a battle I believe Microsoft is destined to win. Cloud computing is closer to Microsoft’s core business, and the company enjoys a distinct server software cost advantage. Linux is widely known to power the internet, but Microsoft is closing the market share gap according to Microsoft TechNet and Netcraft. The two are currently in the midst of a price war while dragging Google  (GOOG) along for the ride.

IBM  (IBM), another major player in the cloud space. According to IBM, it’s the number one cloud provider based on total profit generated from cloud-related services. IBM has resisted dropping its prices as it attempts to position its services as the top shelf offering. The strategy could backfire and allow Microsoft to gain revenue and ultimately profit as it gains market share.

It’s an approach that may only work for as long as cloud computing doesn’t become a commodity. Something I believe is happening right now. Rackspace Hosting (RAX) is another large player and the most significant stock price diver lately is takeover hopes by CenturyLink (CTL).

A Rackspace takeover is a sign of a maturing market. A market space that may soon become commodity priced. You can bet IBM is watching the developments carefully. As I write this, Rackspace shares are getting crushed because confidence of a buyout is waning.

Microsoft’s other gem is Xbox. Xbox enables Microsoft to remain in everyone’s home even if they don’t have a PC. The game platform is a leader and virtual earnings printing press. The best way to analyze a company is through the numbers. Opinions on Windows OS’s pending demise can cloud your judgment.  The stock is trading at four times revenue and 15 times earnings, making the shares priced as if it will have little to no growth.

If the company does begin to spin its wheels and stagnate, there’s a 2.7% dividend yield to earn while waiting for the shares to climb. That’s really what it’s about, the ability to buy value that others don’t see.

 

At the time of publication, Weinstein had no positions in securities mentioned.

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