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Cloud services drive Microsoft growth

Satya Nadella, MSFT.jpg
Satya Nadella, Microsoft’s CEO sees the cloud as key to the company’s future. (Microsoft photo)

This update on Microsoft appeared in the Oct. 22, 2018 issue of the Internet Wealth Builder investment newsletter. The stock was originally recommended on Apr. 9/18 at $90.77. It closed Friday Oct. 19, 2018 at $108.66. (All figures in U.S. dollars.)

Background: Microsoft (NDQ: MSFT)  is the world’s largest software company. It is best known for its Windows operating system, which runs about 90% of the world’s personal computers, and its Office suite of applications. Microsoft also owns LinkedIn, Skype, and markets the Xbox gaming system.

Performance: Microsoft has delivered strong gains this year as double-digit revenue and profit growth has helped push its shares higher. The stock is up almost 20% since being recommended in April.  One-year total return including dividends is about 43%.

Recent developments: Shortly after our last update, Microsoft reported 2018 fourth quarter and year-end results for the period ended June 30. Revenue rose 13.1% in the quarter to $30 billion, with strong gains in all three of its businesses: Consumer Computing, Productivity and Business, and Cloud Computing. Microsoft earned $8.8 billion in the quarter, up 5.5% from a year earlier.

Microsoft’s trailing price-to-earnings (p/e) ratio is a lofty 51.01 according to Yahoo! Finance. But that’s reasonable given the quality of the company, the strength of its balance sheet, and its prospects.

Dividend: Microsoft raised its quarterly dividend to $0.46 per share in mid-September ($1.84 per year). The four-cent rise is a 9.5% increase, payable with the December payment. The stock yields 1.7%.

The dividend increase came a month ahead of Microsoft’s first quarter 2019 results, which will be released Oct. 24. The timing implies another strong quarter as well as a management vote of confidence in the year ahead.

Outlook: Microsoft continues to gain from its 2014 strategic shift to cloud-computing services, called Azure. This has stopped the sales erosion of Microsoft Office by moving it from a one-off purchase to an online subscription, renewable each year. As more companies turn to cloud computing for data storage, Microsoft is growing with the trend.
Two recent initiatives illustrate how this is affecting the company.

Earlier this month, Microsoft said it is expanding its cloud service into government and announced a bid for a $10 billion Pentagon contract to help it reduce IT costs and streamline operations. The upgrade is part of a larger Department of Defense initiative. The only other bidder is Amazon.

In another move this month, Microsoft invested an undisclosed sum in a Singapore-based ride-sharing company called Grab. Grab will use a number of Microsoft products, including Azure, to store and manage information.

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1 comment on “Cloud services drive Microsoft growth

  1. Pingback: Microsoft sees cloud healthcare future – Adam Mayers

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