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Money Morning's oversold pick of the week is tech giant Microsoft Corp. (Nasdaq: MSFT).
Sometimes stocks get beaten down unfairly - but they're actually a great value. The share-price dip then gives investors an amazing entry point into a good long-term investment.
Microsoft stock has been a favorite of Money Morning Capital Wave Strategist Shah Gilani and Money Morning Defense & Tech Specialist Michael Robinson for more than a year. And this week Money Morning Special Contributor Michael Lewitt, a Wall Street and hedge fund veteran, weighed in with a strong defense of MSFT stock.
Microsoft Corp.: About the Company
A tech industry icon, Microsoft Corp. was founded by Bill Gates and Paul Allen in Albuquerque, N.M., on April 4, 1975. Microsoft started out making versions of the BASIC programming language for early PCs. Microsoft moved to Bellevue, Wash., in 1979 and to its current headquarters in Redmond, Wash., in 1986. Microsoft's road to domination of the PC industry started when it made a deal with International Business Machines Corp. (NYSE: IBM) in 1981. Microsoft licensed the DOS operating system to IBM but retained the rights to the software. When PC clones emerged, Microsoft sold MS-DOS to all of them, creating a virtual monopoly. MS-DOS set the stage for Windows, which today runs about 90% of the world's PCs. In 1989 Microsoft introduced Office, which soon became the standard suite of business software. Over the years the company has developed a wide range of tech products and services for both consumers and businesses. Today MSFT employs 122,935 people worldwide. It has a market cap of $344 billion.
Microsoft Stock: Why It's Oversold
For the past 18 months, investors had been in love with Microsoft stock, pushing it up by 50%. Much of that enthusiasm arose from departure of Chief Executive Officer Steve Ballmer and the arrival in February 2014 of new CEO Satya Nadella. His "mobile-first, cloud-first" strategy seemed just the tonic for a decade of stagnant MSFT stock performance. Until this past Monday, at least. That's when Microsoft reported its second quarter earnings after the market close. They were mostly in line with expectations, although revenue just missed. Slumping PC sales pulled down the Windows division, and foreign exchange issues with strong U.S. dollar ate into revenue. And Microsoft warned these problems would persist for much of 2015. That sent Microsoft stock down 9.25% on Tuesday. For the week, MSFT stock is down more than 13%. Investors are worried that Nadella's strategy isn't ramping up fast enough to replace declining revenue from the company's legacy businesses.
But selling Microsoft stock now is a big mistake...
Why MSFT Is a Stock to Buy
"Microsoft remains a formidable company and if the stock drifts much lower, investors should pounce," Lewitt wrote in a Thursday Money Morning article. He noted that the quarterly results had tough comparisons with the year-ago period. And the areas that did well, such as the Surface Pro tablet and the cloud segments, are where Microsoft's future growth will come from. Cloud revenue grew 114% on top of a 128% gain in the previous quarter. And cloud revenue has grown to 5% of overall revenue, making it a meaningful contributor. Lewitt also likes Microsoft's balance sheet. The company had $90.25 billion in cash and equivalents at the end of 2014 versus long-term debt of just $18.26 billion.
But the key to understanding Microsoft right now is that it's a company in transition. There will be a few bumps in the road, but that road leads to higher profits. The legacy Windows and Office businesses needed an overhaul, and Nadella is doing that. Microsoft is rapidly moving Office customers to a subscription model. In the past quarter Office subscriptions jumped by 30%. And while Windows 10 will be a free upgrade for many customers, that move is part of a master plan to build up the Windows mobile ecosystem to compete with the iPhone and Android. Microsoft also debuted its most exciting technology in decades last week with the HoloLens. This goggle-like device is a next-generation holographic computing platform. The HoloLens proves MSFT can still come up with major innovations.
Investing in Microsoft Stock (Nasdaq: MSFT)
In the wake of Monday's Q2 earnings report, many analysts cut their price targets on MSFT stock and some downgraded it from a Buy to a Hold. That has pushed Microsoft stock down to $40.40 as of Friday's close, and it could go lower. "Anywhere in the low $40 range is an attractive entry point," Lewitt said. "Investors should be prepared to welcome it to their portfolio now that the stock has sold off and should aggressively do so if the stock drops to $40 per share. MSFT is a steal." Investors should also note that Microsoft pays a dividend of $1.24 a share for a yield of 2.9%.
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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.