MSFT Stock: If Microsoft Corporation Pulls This Off, Shares Could Soar

MSFT StockThis Could Send MSFT Stock Soaring

The bears quickly came out of the closet, ripping into Microsoft Corporation (NASDAQ:MSFT) stock after it announced it would pay a whopping $26.2 billion for LinkedIn Corp (NYSE:LNKD).

I heard arguments like how it wasn’t a good fit, how Microsoft has a history of horrible acquisitions (Nokia’s phone business and Skype), and how this would be just another one of those bad acquisitions.

MSFT stock retrenched below $50.00 on the LinkedIn acquisition news and is trading down from its 52-week high of $56.85 in December 2015.

Microsoft Corp

Chart courtesy of www.StockCharts.com

Now, I admit that I was at first taken aback by the $196.00 per share—or 50% premium—paid by Microsoft for LNKD stock. However, I convinced myself it was a reasonable deal. Even though MSFT stock has retrenched, instead of running away from Microsoft and the LinkedIn deal, I would be embracing it. Why? Because I feel the long-term benefits for Microsoft will far exceed the cost.

A closer look indicates Microsoft has a massive war chest of $105 billion in cash to buy LinkedIn.

Microsoft was looking at buying cloud rival salesforce.com, inc. (NYSE:CRM) in 2015, but decided the price was too high. So far, it was the right move, as Microsoft has developed a formidable cloud operation. Salesforce was apparently also looking at LinkedIn before Microsoft swooped in and made the deal.

Why LinkedIn Could Be Big

Microsoft is paying about eight-times (X) LNKD sales for LinkedIn, which is not expensive given that the leading social media stock, Facebook Inc (NASDAQ:FB), trades at 17X its sales. On this note, Twitter Inc (NYSE:TWTR) looks really cheap at 4.7X its sales and could attract a bid.

However, the reality is that Microsoft needed LinkedIn to finally get into the social media space where it doesn’t have a big presence.

Microsoft will gain access to more than 440 million users and more importantly, the quality of LinkedIn’s userbase is quite good, consisting of many professionals. Access to this userbase will help propel the cross selling of Microsoft’s office productivity software and cloud services to its target market.

And keep in mind that LinkedIn is a proven social media platform with no comparisons. The company has solid fundamentals with revenue set to grow 24.5% to $3.72 billion and 19.6% to $445 billion, respectively, in 2016 and 2017.

Let’s first make it clear that the past dismal deals were under the leadership of ex-CEO Steve Ballmer, rather than Microsoft’s current CEO, Satya Nadella, so you can’t hold Nadella responsible.

If you have been following him, you will immediately notice how he is not like Ballmer. Instead of focusing on the dying PC market and old technologies, under Nadella, Microsoft is moving to a mobile and cloud focus, which, so far, is paying off.

Microsoft is now one of the top cloud plays in the market. Its “Windows 10” operating system is rapidly finding itself (whether you want it or not) on PCs and laptops with the goal of one billion users. And the company’s “Surface” tablet/laptop hybrid has received great reviews and is a powerful and compact mobile alternative to other laptops and tablets on the market. Finally, Microsoft’s “Xbox” gaming unit is faring well, beating Sony’s “PlayStation” in recent sales.

The bottom line is that Microsoft stock is not the same company it was under Ballmer and I expect the company will flourish under the vision of Nadella.