Tech stock Microsoft’s head’s in the cloud

Vancouver-headquartered Odlum Brown’s technology stocks analyst, Steven Zicherman, says the view that Microsoft is primarily a consumer-oriented PC/Windows-and-Xbox-dependent company is wrong. More than 70 per cent of Microsoft’s profit now comes from its commercial operations serving business, government and non-profit clients.

microsoftThe knock against Microsoft Corp. (NASDAQ─MSFT) is that it is selling and developing wonderful technology that will do a fantastic job of meeting the needs of the 1990s. This assessment tends to equate Microsoft with Windows and to dismiss the value of both that business and the rest of the company.

Odlum Brown technology stocks analyst Steve Zicherman says that view is wrong. He reiterates his “buy” recommendation and 12-month target of $57 for Microsoft Corp.

Mr. Zicherman begins his report by reminding investors that Microsoft has two operating divisions: Consumer & Devices (including Windows, Xbox gaming and phones), and Commercial (productivity software – including Office – for organizations) and IT services. He also point out that the company has an enormous base of patents and patents pending.

And, while many people view Microsoft as primarily a PC/Windows-dependent company, Mr. Zicherman notes that it generates about 70 per cent of its profit via its “enterprise-,” or commercial-, focused operations. These serve business, government and non-profit clients and their earnings have been growing at about 10 per cent a year.

The flagship product of this division is the information technology suite of Office software, which includes Word, Outlook, PowerPoint and Excel. Most customers view these as critical infrastructure and essential for doing their work; they keep renewing multiyear licenses. Microsoft has also introduced higher-margin cloud versions of this information technology software, including Office 365.

The analyst says, “We believe that the Microsoft enterprise software suite will continue to be the software choice of most businesses.”

New CEO came from cloud computing

He also draws attention to the company’s still relatively new chief executive officer, Satya Nadella. (He began the job in February 2014.) Microsoft’s third CEO (after Bill Gates and Steve Ballmer), Mr. Nadella was previously chief of Microsoft’s cloud computing operations and his appointment signals that Microsoft sees the cloud as key to its future.

The analyst says the stock trades “at the low of its historical range prior to the credit crisis and below our estimate of the company’s intrinsic value.”

Mr. Zicherman is hardly alone in his positive assessment of Microsoft. As he points out, it is one of only three U.S.-based companies rated “AAA” by Standard & Poor’s Debt Rating Services.

How does the market view this information technology stock? Over the past year, the stock chart has been choppy, but essentially moved sideways. The 52-week high is $50.04; the 52-week low is $39.72. Over the past three years, however, the stock has gained roughly 50 per cent.

Microsoft recently hiked its quarterly dividend 16 per cent to $0.36, or $1.44 a year.


Investor’s Digest of Canada, MPL Communications Inc.
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