Why I’m Bullish on MSFT Stock
What do you picture when you hear the name Microsoft Corporation (NASDAQ:MSFT)? For most people, it conjures up an image of dusty old computers from the 1980s, but that era has passed. MSFT stock is back at the forefront of technology.
Let me explain…
Microsoft has been around for roughly four decades, making it much older than most people working in Silicon Valley. It is a generation removed from the dotcom bubble, which was, in turn, a generation before the technology “unicorns” of today.
“Unicorn” is a slang term for startups that have crossed $1.0 billion in valuation (on paper). These companies often go public, making their shareholders very rich in the process.
Most investors would cut off their left arm to invest in a unicorn stock before its initial public offering (IPO), but startup funding is restricted. Retail investors don’t normally get the chance to invest at the ground floor, so they wait for the IPO.
Rather than investing in “old” technology firms like Microsoft (it’s old and dusty, remember?), they want to piggyback on the rise of newer firms. Unfortunately, most of these companies are just selling pixie dust wrapped in a good story.
They have neither profits nor a viable business model. As a result, their stock prices usually collapse within weeks of going public. The market finds balance.
But this dynamic can be very frustrating for retail investors. Many of them watch from a distance as venture capitalists in Silicon Valley, most of whom are already multi-millionaires, get rich through early access to startups.
What chance does the average Joe have? He sees the innovation happening in Silicon Valley and wants to get a piece of it. How can he surf the technology wave to outsized returns?
Well, listen closely, because there is a way. All you have to do is remember this one rule: follow the money. It is a pretty simple concept; invest in the “old” technology companies that are buying startups and follow the money right to them.
When a company like Microsoft buys a little startup, it is effectively outsourcing part of that startup’s innovative process. Companies like Microsoft seek out little companies that solve a particular problem they have or a firm that gives them a slight competitive edge and they swallow these little startups whole.
Here’s what that means: Companies like Microsoft used to have one growth spurt and that was it. They would stay huge, but growth would be nonexistent. Now, by buying out startups, they can have two, three, or even four growth spurts.
Buying startups has opened the roof on MSFT stock. Last year, Microsoft was second only to Google in terms of acquisitions. It has spent an enormous amount of money to keep ahead of the pack. (Source: “Microsoft: One of the Most Active in Tech Startup Acquisitions,” Market Realist, March 10, 2016.)
For instance, Microsoft bought a startup called Metanautix last year to bolster its cloud services. The acquisition is helping to integrate “Microsoft Office” and “One Drive” into a cohesive and intelligent cloud solution. (Source: “Microsoft acquires Metanautix,” Venture Beat, December 18, 2015.)
Microsoft is also beefing up its digital security. Part of the reason is to protect information on the cloud, but it can also make it harder for consumers to download illegal versions of “Microsoft Office.” That should provide a nice boost in revenue.
I know some of you are probably not convinced yet. It can be difficult to shake the image you have of a company, but keeping an open mind is central to good investing.
Microsoft is simply not the company we thought it was. The firm has reinvented itself under the leadership of CEO Satya Nadella. There is more energy and collaboration now.
And those positive vibes are showing up in Microsoft’s financial statements. Metanautix was acquired to boost Microsoft’s “Azure” division and it did. The Azure segment grew by 120% last quarter.
And on the gaming side of things, “Xbox Live” subscriptions jumped by 26% to 46 million users. Meanwhile, the “Surface,” Microsoft’s laptop/tablet, sold 61% more than the year before. (Source: “Earnings Release FY16 Q3,” Microsoft Corporation, April 21, 2016.)
Seeing is believing, as the saying goes. These double-digit growth numbers look like they belong to a freshman startup in Silicon Valley. Instead, they’re from an “old” technology company. I consider that definitive proof of Microsoft’s turnaround.
I guess my point is this: follow the money to big companies that are absorbing the hottest startups, because investments like MSFT stock could bring way higher returns than a flashy IPO.