Whether to buy Microsoft stock is a question investors started pondering last year as the iconic tech company shed its decade-long status as a perennial laggard.
As Microsoft Corp. (Nasdaq: MSFT) stock soared nearly 40% from November 2013 to November 2014, investors were eager to jump on board.
But since then, investors have had reason to wonder if it's still a good idea to buy MSFT stock.
The MSFT stock price peaked at $50.05 in November 2014, but then began to slide. Microsoft stock was as low as $40.12 on April 2.
A disappointing earnings report in late January chopped 9% off the Microsoft stock price in one day. But a strong earnings report in April helped the Redmond, Wash.-based company regain that lost ground and then some.
The confusing price action has left Microsoft stock down nearly 4% on the year, slightly worse than the market averages. MSFT closed at $44.40 on Monday.
And as the following price forecasts show, analysts can't seem to make up their minds...
Analysts Can't Agree on MSFT Stock
Back in April, both Goldman Sachs Group Inc. (NYSE: GS) and Citigroup Inc. (NYSE: C) put an unusual "Sell" rating on MSFT. Citi reiterated that rating this week along with its gloomy $37 one-year price target.
Another firm, Wunderlich Securities, initiated coverage of Microsoft in early June, but don't expect a tiebreaker. Wunderlich rates MSFT stock a "Hold."
The Microsoft naysayers generally share these concerns:
- Slumping PC sales will hurt Windows revenue despite the upcoming release of Windows 10.
- The plan to offer Windows 10 as a free upgrade for Windows 7 and Windows 8 users will also eat into revenue from that division.
- Cloud businesses with lower margins could cannibalize its Windows and Office cash cows.
- While Microsoft's cloud businesses are growing rapidly, it's not enough to compensate for declines in other divisions.
- The strong U.S. dollar continues to drag on earnings.
- Suspicions are that another round of layoffs is imminent.
Here's why they're wrong...
Why Microsoft Stock Is a Buy
Fortunately, Money Morning's experts are not at all confused about whether to buy Microsoft stock.
Both Defense & Tech Specialist Michael A. Robinson and Capital Wave Strategist Shah Gilani see the concerns of other analysts as short-term headwinds.
Robinson said he was undeterred by the poor earnings report in January and believes MSFT's cloud opportunity is much bigger than critics think.
"I believe this huge rally gets down to two factors - its growth in cloud computing and the quality of leadership of CEO Satya Nadella," Robinson said. "The two actually go hand-in-hand. After all, Nadella has made growth in the cloud one of his main objectives."
With the cloud sector expected to grow 30% a year through 2020, Microsoft is well-positioned to reap a lot of growth there. Better still, with its revenue more than doubling year over year in the first quarter of 2015, Microsoft is gaining market share on industry leader Amazon.com Inc. (Nasdaq: AMZN).
"It's hard to believe that many on Wall Street were writing Microsoft off as a cloud loser just a few quarters ago," Robinson said.
He also likes Microsoft's mobile strategy. Realizing that leveraging its rivals' platforms makes better business sense than ignoring them, Microsoft has made its Office software and voice assistant, Cortana, compatible with Android and iPhone.
Likewise, Gilani thinks the plan to make Windows 10 a free upgrade for many users will pay off in the long run.
"Lots of Reasons" to Buy MSFT Stock
"You acquire new customers by some freemium programs and hold onto old customers by engaging them with new and better products," Gilani said. "You enlist them to basically self-market the company's products by giving them a lot of reasons and access to try other integrated products in the ecosystem, and you monetize all that."
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And unlike those who see Microsoft's small global market share in smartphones as a problem, Gilani sees it as an opportunity.
"Right now, the company's phone offerings make up about 0.8% of the Chinese market of nearly 600 million smartphone purchases," Gilani said. "That means Mr. Softy has mega-room to improve its penetration into that market - and you can count on that being a core strategy going forward."
And that's just the beginning.
"There are lots of reasons why I like Microsoft," Gilani said. "One, it's cheap. Two, it yields 3% and counting. Three, there's all the cash the company continues to stockpile. Four, there's new management running the house."
Gilani thinks investors who buy Microsoft stock just need to be patient.
"This is absolutely a long-term play," Gilani said. He expects MSFT stock to hit $50 again by mid-2016, and to reach the $60 to $65 range by the end of 2016.
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.