Microsoft: Into the Cloud

11/17/2016 10:00 am EST

Focus: STOCKS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

We're moving into the cloud with the latest stock recommendation for our portfolio, explains growth and income expert Mark Skousen, editor of Forecasts & Strategies.

Microsoft (MSFT), the giant computer software and technology company based in Seattle, Washington, is making a strong showing.

It is truly a stock for the long run that is doing very well now in the short run under the new CEO, Satya Nadella, Microsoft’s third leader.

Founder Bill Gates stepped down as chairman in 2014 but remains “chief technology adviser” and is still the largest shareholder. His successor, Steve Ballmer, is now also running the NBA basketball team, the Los Angeles Clippers.

Not only has Microsoft continued to dominate its Windows software series (now up to Microsoft 10), but Office 365 is dominating the business software division.

It is also expanding into smart phones through Nokia (NOK), video conferencing through Skype, and video games through Xbox. Microsoft expects to close the acquisition of LinkedIn (LNKD) in 2017.

But its boldest move is in cloud computing. Microsoft is expanding rapidly in this field, posting 1,116% growth in the cloud space in the third quarter, but is still way behind Amazon (AMZN), so there is still room for growth.

In addition to making strategic acquisitions, Microsoft Azure recently announced a partnership with Adobe (ADBE), the leader in marketing the cloud, in an effort to catch up fast with Amazon. 

And profit margins are higher on Azure than on the legacy Microsoft business division. It is all paying off.

Profit margins are approaching 20%, and return on equity (ROE) is 22%. The company earned $27 billion in the past year on $85 billion in revenues.

MSFT has $137 billion in cash, plenty to cover its $76 billion long-term debt obligations. It is selling for 18 times expected earnings in 2017 and yielding 2.6%.

And after beating Street estimates in October, the stock hit a landmark, finally surpassing its previous all-time high of $60 a share back in 1999, at the height of the dot-com boom.

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By Mark Skousen, Editor of Forecasts & Strategies

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