By CCN.com: Microsoft proves that legendary companies can have surprising second acts. Under the leadership of CEO Satya Nadella, Microsoft stock has soared while delivering insanely remarkable earnings growth. Nadella has managed to overcome the disastrous reign of Steve Ballmer and set Microsoft stock up as the latest security to reach a trillion-dollar market cap.
Third-quarter earnings were fantastic at every level. There are reasons for this, but the numbers come first.
Revenue soared 14% to $30.6 billion. Operating income skyrocketed 25% to $10.3 billion. Net income screamed 18% higher to a whopping $8.8 billion.
The growth in Microsoft stock has been outstanding thanks to Nadella’s commitment to cloud computing. Revenue in that division hit $9.7 billion, up 22% year over year. This division was led by a blockbuster increase of 73% in Azure revenue growth and 27% in server products and cloud services revenue.
MSFT earnings were also driven by a 14% revenue increase in Productivity and Business Processes, to $10.2 billion. Despite skepticism that Microsoft’s purchase of LinkedIn would prove to be a albatross, LinkedIn saw a 27% revenue increase, and record levels of engagement.
The company’s famous Office suite of products, both Commercial and Consumer, saw revenue growth of 12% and 8%, respectively.
Despite the extraordinary growth in these divisions, Microsoft stock still generates solid revenue from its More Personal Computing division: An 8% increase to $10.7 billion
Azure has emerged as a real treasure and driver behind Microsoft stock. Microsoft has signed on gigantic companies to the Azure product, including Kroger, Walgreens, and ExxonMobil.
Why has Microsoft managed to post such incredible growth at a time when most legacy tech companies are struggling? Management is exceptional under Nadella’s leadership.
Nadella has been hyper-focused on reinventing Microsoft and on MSFT stock regaining a growth trajectory. Ballmer sat on his laurels and did nothing to move the company forward.
The other key element of Nadella’s success is you never see his name in everyday news headlines. He tends to his knitting. Meanwhile, the tech tyrants like Jack Dorsey of Twitter, Mark Zuckerberg of Facebook, and Jeff Bezos of Amazon, suck all the air out of the room with their behavior and lousy company cultures.
The only reason Dorsey was invited to the White House was because Twitter has been censoring conservative voices. Zuckerberg is constantly in the news thanks to Facebook’s privacy issues and censorship. Bezos is destroying one industry after another.
Nadella understands the market and how to service it. He’s leveraged the company’s existing infrastructure, made some great acquisitions, and the result has been a tripling of MSFT stock over the past five years.
Microsoft stock is supported by a balance sheet with $132 billion in cash, offset by only $66 billion in long-term debt. Microsoft generates north of $40 billion in free cash flow. The company is a cash machine, yet still only pays a 1.56% dividend. There’s room for that to go higher.
Backing out Microsoft’s $66 billion in net cash, it’s market cap stands at about $900 billion. Trailing twelve month earnings are a tremendous $35 billion, putting the trailing P/E ratio at 26.
Analysts project annualized 5-year earnings of 15%. With a company like Microsoft, a 10% valuation premium is routinely assigned for each of the following: world-class brand name, high free cash flow, high levels of net cash. Microsoft has all of those. Thus, one would add 30% to the 15% growth rate and get a P/E ratio of 19.5 as being fair value.
That would give Microsoft a nominal PEG ratio of 1.36. Normally, a PEG ratio needs to be 1.0 or lower to be considered a value play.
However, with growth stocks pegged at a 15% or higher growth rate, most analysts will permit a PEG ratio of up to 2.0.
On that metric, Microsoft is both a growth and value stock.