Microsoft's Latest Makeover

09/19/2018 5:00 am EST

Focus: TECHNOLOGY

Richard Moroney

Editor, Dow Theory Forecasts

The problem with reading (and writing) about Microsoft (MSFT) is that we all understand the company already. At least, we think we do, explains Richard Moroney, growth and income expert and editor of Dow Theory Forecasts.

Investors with some gray in their hair probably remember when Microsoft was the poster child for new-millennium technology — and the years after the tech crash of 2000, when the software giant gradually lost its glow as the internet and mobile phones took center stage.

 In some ways, Microsoft remains what it always was, a market-leading software developer with an unmatched base of longtime users. But take a peek beyond the Windows, and you’ll see the benefits of serious remodeling.

Microsoft has reinvented itself more than once, and we appreciate the most recent makeover. In 2016, Microsoft sold its troubled Nokia business and purchased business-networking site LinkedIn. Since then, Microsoft has invested heavily in cloud computing, mobile devices, and internet services.

Microsoft’s growth accelerated in the year ended June, with sales up 14% and per-share profits 18%, versus respective three-year annualized growth rates of 6% and 13%.

Intelligent Cloud revenue rose 18% for the year and 23% in the June quarter, with most of the growth in server products and cloud services. Microsoft’s Azure platform, which provides software, infrastructure, and services for cloud computing networks, posted 89% revenue growth in the June quarter.

Commercial services, Xbox gaming software and services, and Surface tablet computers offset sluggish results for the traditional Windows operating system.

Not surprisingly, given Microsoft’s huge installed customer base, the company generates massive and consistent cash flows. Over the last year, Microsoft recorded nearly $44 billion in operating cash flow, good for second-highest among S&P 500 Index stocks.

That cash allows the company to build up its cloud network, make niche acquisitions, and buy back shares. Microsoft paid out $12.7 billion in dividends last year. The stock yields 1.5%, and the dividend has increased at an annualized rate of 15% over the last five years and 17% over the last 10.

Microsoft’s growth accelerated in the year ended June, with sales up 14% and per-share profits 18%, versus respective three-year annualized growth rates of 6% and 13%. Microsoft seems capable of continued double-digit sales and profit growth. The stock is being added to our Buy List. 

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