Microsoft Corp.'s (MSFT, Financial) robust growth numbers have helped the company’s valuation immensely as the stock continues to hit new 52-week highs on a regular basis. The stock has been on a steady upward march since June 2016, and the odds are quite high for the trend to continue as the company's cloud revenue growth shows no signs of slowing down. Is it worth buying Microsoft at this price point or should investors wait for a pullback?
For a pullback scenario to happen, Microsoft needs to be hit with some bad news. The company has smartly put all of its “problem children” in one basket. Windows, gaming, search advertising and devices are all under one umbrella: the more personal computing segment. This is the segment where products either face an uncertain future, like Windows, or an extremely competitive market environment where Microsoft is not the market leader, such as devices and search advertising.
This segment also has the lowest operating income and growth has been flat or negative for the past several quarters. Even if things go wrong in this segment, the market is going to shrug it off and look at the growth of the other two segments - productivity and business processes and intelligent cloud - and reward Microsoft’s performance.
The odds are quite slim for Microsoft to lose its grip on the cloud computing segment because it already holds the top spot in software as a service, or SaaS, thanks to Office 365. It also holds the number two position in infrastructure as a service, or IaaS, thanks to Microsoft Azure and its many offerings. According to Gartner, the IaaS and SaaS segments are expected to grow at strong double-digit rates over the next several years.
SaaS is expected to double in size by 2020, and the IaaS segment is projected to triple by 2020. Since Microsoft leads in both areas, it is no surprise both divisions are growing at a much faster rate than the industry. As one segment feeds the other, Microsoft will continue to enjoy robust growth in cloud, which makes it difficult for the company to have a bad quarter, which would cause a pullback to occur.
Microsoft is trading around 21.5 times forward earnings, which is slightly lower than the 22.9 times Alphabet Inc. (GOOG, Financial) (GOOGL, Financial) is trading at. Both companies are enjoying favorable market conditions in segments where they are leaders, which will allow them to grow at double-digit rates over the next several years. The odds of a pullback for Microsoft are extremely low. If the company does happen to have a bad quarter, investors should jump in with both feet and buy the stock. If not, the best thing to do would be to buy the dips or wait for overall market weakness.
Disclosure: I have no positions in the stock mentioned above and have no intention of initiating a position in the next 72 hours.
