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Is Microsoft Stock a Buy After Its 70% Gain? (MSFT)

Microsoft Corp. (Nasdaq: MSFT) is a laggard no more.

After more than a decade of bobbing around the $30 mark, Microsoft stock is up 70% since April of 2013.

Money Morning Capital Wave Strategist Shah Gilani recognized the surprising turnaround early on, and started publicly recommending MSFT stock in July 2013.

Back then Gilani liked that Microsoft paid a dividend that was likely to rise, and predicted a "shake-up" at the Redmond, Wash.-based tech giant that would propel MSFT stock to $50 before the end of 2014.

"Other analysts thought I was way out on a limb... swinging over a river of hungry crocodiles," Gilani said later. "They thought I was wrong because they believed that Microsoft couldn't change its ways. But I knew differently. As I said during a number of interviews, I knew Microsoft could change. In fact, I knew it had to change."

Just a little over a month after Gilani's original call, CEO Steve Ballmer announced he would retire in the next 12 months.

That paved the way for new CEO Satya Nadella to take over in February. And that's a huge reason behind MSFT's rebound...

MSFT Stock Driven by Its "Cash Machine"

Nadella's fresh approach has helped pushed Microsoft stock to Gilani's target price of $50, which it hit in intraday trading Nov. 14.

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That surge briefly pushed Microsoft past Exxon Mobil Corp. (NYSE: XOM) to become the world's second most valuable company behind Apple Inc. (Nasdaq: AAPL).

Since Nadella took over, Microsoft has had several solid earnings reports. In its most recent quarter, Microsoft grew revenue 24.8%, for example, partly because of a 47% increase in its "devices and consumer business" and a 128% increase in its cloud business.

In April Gilani described the company as a "cash machine" when he again recommended investors buy Microsoft stock.

"Over the last 10 years, MSFT's cash return on invested capital has risen to 93%. That means that - for every $1 of capital it has invested - Old Mr. Softy has been able to generate $0.93 in cash. Yeah, you heard that right. Over the last 10 years, Mr. Softy had been a cold, hard cash machine. On a sales basis, for every $1 in sales the company generates, $0.35 gets turned out as free cash flow (FCF). Over the last 10 years, Microsoft has grown its FCF by 9%," Gilani said.

But now that it has hit $50, is Microsoft stock a buy? Or should investors take their profits and move on?

Gilani's answer may surprise you...

Why Microsoft Stock Is a Buy at $50

Not only does Gilani think current investors should hang on, he says MSFT stock is a buy even at $50.

"I love the turnaround I've seen, I love the new management, I love where they're going," Gilani said in a Wednesday appearance on the FOX Business' "Varney & Co." program. "I think MSFT is something you have to own and hold."

From here, Gilani sees MSFT stock doubling to $100 within five years - a prediction he made all the way back in April.

"Getting to $100 is an 'out with the old, in with the new' type of deal... and it has to do with CEO Satya Nadella," Gilani said. "This is more than just a mindset change. It's about the company's more dynamic focus on mobile computing. It's about smartphones in the future. It's about entertainment and gaming and Microsoft's success with its Xbox gaming system, which the company created from scratch. It's about Skype, too. It will be about integration. And new technologies."

The combination of the company's growing cash flow and aggressive moves on several fronts will keep pushing Microsoft stock toward $100, he said.

"All the company's devices are terrific. The only problem some of them have is that they carry the Microsoft brand... and that can elicit a visceral reaction from some consumers," Gilani said. "But their products are just too good for users to ignore. And there are more moves coming. Folks will see that I'm right about MSFT being one of the best stocks to buy now."

The Bottom Line: Microsoft stock recently reached $50 - just as Money Morning's own Shah Gilani predicted last year. But it's not too late for investors to jump on the MSFT bandwagon. Gilani sees MSFT stock going to $100 within five years.

 

 

More Insights from Shah Gilani: As we hurtle toward the end of the year, Gilani believes that the markets are headed higher, and for one simple reason. Understand this, he says, and you can pick some big winners. It starts with certain Wall Street types wanting to keep their jobs...

Follow me on Twitter @DavidGZeiler.