Executive
Summary: During 2016 Q1, Microsoft returned
$6.5 billion to shareholders in the form of share repurchase and dividends.
Businesses everywhere are using the Microsoft Cloud as their digital
platform. With the combination of Cloud and Windows 10 adaptation, Microsoft
consistently adding value to shareholders. Microsoft has a healthy portfolio
of products (Office 365, Windows, Azure and SharePoint to name few) to
enhance performances across the company. It has diversified earnings
potential across its core business Windows and Office products and
accelerated growth in Cloud based services. Microsoft is heavily investing in
niche areas such as Cloud and Augmented Reality; these two niche technologies
will have substantial growth opportunities for next decade. With recent
change in CEO, Microsoft has redefined its strategy and clearly sent a
positive signal to shareholders. With sixteen percent growth for the past
year alone, Microsoft stands at third largest publicly traded company behind
Alphabet and Apple.
Valuation: Microsoft
currently trades at multiple of 35 where the industry average is 34, and
healthy 5-year dividend payout ratio 2.67% whereas industry average is barely
0.3%. Consistently beating industry and sector in EBITDA with gross operating
margin of 30.1% compared with 5.0% of industry margin and 18.5% of sector
margin. Under the discounted cash flow (DCF) model Microsoft terminal value is $521 billion.
Moat:
During past 13 years Microsoft’s average return on equity was 34.26% that was
72% higher than the industry average. Microsoft's wide economic moat is a
combination of the Windows operating system, Office productivity suite, and
the Windows Server, database, and cloud businesses. Microsoft has adjusted
its strategy as enterprise workloads continue to shift to the cloud, away
from the client/server model. Billions of dollars invested in the Azure
platform are beginning to pay off, and its more open approach to delivering
software in the cloud will prevent the firm from material technology
disruption.
Recommendation: I
have a buy recommendation, with a 1-year price target (2017Q1) of $60.15. The one-year
price target implies a 2016 P/E of 23.2x, with impressive 19 percent of
increase in share price. Under CEO Satya Nadella’s leadership, Microsoft is
reinventing itself into multiple new business platforms. While making Office
suits products from desktop based to cloud model, Azure, and Augmented
Reality, company value with multiples of 23x is very reasonable for next four
to five years.
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Sunday, May 8, 2016
Microsoft - Buy side stock report issued on May 8, 2016
Labels:
Microsoft,
MSFT,
Stock Analysis
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