Microsoft Stock (MSFT): The Comeback Has Only Just Begun

While the $2.5 billion acquisition of "Minecraft" game maker Mojang announced today (Monday) will benefit Microsoft Corp. (Nasdaq: MSFT), that's just one of many reasons that Microsoft stock is making a comeback.

Actually, the most important takeaway for investors from the Mojang deal is not so much what it will do for Microsoft stock as what it tells us about the "new" Microsoft and where it's going.

The new Microsoft was born in February when Satya Nadella took over the CEO post from Steve Ballmer, and the company's prospects have been on the rise ever since. Microsoft stock is up 28% in that time, and that trend should continue.

That's quite a reversal from the 14-year Ballmer era, when MSFT stock consistently lagged far behind the overall market.

In his brief tenure Nadella has shown an ability to make the tough decisions and take the risks required to get Microsoft stock moving again.

How the "Minecraft" Deal Helps Microsoft Stock

The "Minecraft" acquisition fits right in with Nadella's larger plans to rejuvenate Microsoft's mobile business, which had languished under Ballmer.

Microsoft stock
"We believe the acquisition of the ubiquitous 'Minecraft' game (almost 54 million copies sold) strategically makes sense as Microsoft looks for ways to drive users toward its nascent mobile hardware business, where it can leverage and cross-sell a wide range of its higher-margin software (e.g., Office 365, Windows)," FBR Capital Markets analyst Daniel Ives said in a client note.

But when looking at Microsoft stock, we need to view the Mojang deal in the context of all the other moves that Nadella has made.

"Nadella has put his seven months as Microsoft's CEO to good use," said Money Morning Defense & Tech Specialist Michael Robinson.

He noted that Nadella wasted no time in cutting some of the bloat at Microsoft, announcing plans to cut 18,000 jobs over the next year - 14% of the company's workforce - with most coming from the Nokia devices unit that Ballmer bought for $9.6 billion.

"The Nokia layoffs show that Nadella has no illusions about the challenges he faces in igniting mobile sales," Robinson said. At the same time, he thinks mobile presents a major opportunity for Microsoft.

Some may look at Microsoft's puny 3.5% share of the smartphone market and think it stands no chance as it goes up against the dominant mobile players, Apple Inc. (Nasdaq: AAPL) and Google Inc. (Nasdaq: GOOG, GOOGL), but that's not how Robinson sees it.

"Being so far back can end up being a good thing," he said. "Market research firm IDC notes that lower-end devices, those costing less than $200, accounted for 58.6% of all Android devices sold in the second quarter. If Nadella can simply double Microsoft's mobile market share and do so with higher margins, that alone would represent major progress."

In fact, IDC projects that Microsoft's Windows Phone platform could capture as much as 6.4% of the market by 2018.

But that's not all...

Nadella Sees Microsoft Profits in the Cloud

Nadella was promoted from Microsoft's Cloud and Enterprise Group, where he had served as vice president.

This is where Microsoft stock should get its biggest boost. The cloud is a huge opportunity, and one that Microsoft is perfectly suited to exploit.

Market researcher Forrester estimates the cloud market will grow from $55 billion in 2014 to $241 billion by the end of the decade.

"As I see it, this should give the cloud business a further boost from its impressive fiscal 2014 third-quarter results," Robinson said. "Office 365, a Cloud offering, now has an annual run-rate revenue of $4.4 billion and grew sales 147% compared with the year-ago results in its fiscal fourth quarter."

When you step back, you see a company pursuing multiple avenues of overlapping growth that should amplify each other as time goes on.

Those that had written off Microsoft stock really should give it a look now. The company is in a very strong financial position with operating margins of 32% and a return on equity of 26%.

Frankly, Robinson said, many investors are underestimating MSFT stock right now.

"You're talking about a company with sterling financials, $50 billion in cash, a dividend yield of nearly 3%, and some very nice catalysts," Robinson said. "The shares are trading at a forward price/earnings (P/E) ratio of 14.4 - a nice discount from the overall market. Throw in that nice dividend and you have a stock that offers us an excellent yield and the prospect of continuing price appreciation."

How much price appreciation?

"If Microsoft stock just gets back to its late-1990s highs in the neighborhood of about $60, we'd be looking at a profit of 44% from current levels Robinson said. "And I think these are the minimum gains we can expect to see. Given Nadella's aggressive plans for mobile and cloud computing and all that cash, I believe that Microsoft will continue to earn double the market returns over the next few years. This leader-turned-laggard has become a leader again."

Follow me on Twitter @DavidGZeiler.

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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