Microsoft Stock: Buy or Sell? 😣DON'T make this mistake

I rarely say this about any stock... but Microsoft (MSFT) is one, that I believe, everyone should own. It'd be a mistake NOT to own it. It's among the strongest blue-chip tech stock with a strong history and turnaround story.

I rarely say this about any CEO... but Satya Nadella deserves a lot of credit for what he's accomplished at Microsoft. It's not easy to turnaround a gigantic boat the size of Microsoft – but he's managed to do that.

A trip down memory lane

Microsoft was co-founded in 1975 by Bill Gates & Paul Allen. It's primary driver of success was its Windows operating system. It first partnered with IBM to bundle its OS/2 operating system with each PC sold, which was a brilliant kickstart to the company. They eventually improved the operating system, which they were selling separately, to include a graphical user interface (GUI). It was a battle of operating systems with Apple and IBM at the time, which Microsoft was the eventual and clear victor.

You can say the rest was history... but in between there was the successful development of Microsoft Office, which we all use today with Word, Excel, Outlook, etc.

This all happened while Bill Gates was running the company until the year 2000, where Steve Ballmer was named his replacement. Besides launching the Xbox gaming system, I wouldn't say that Ballmer left Microsoft in better place than he had received it. Over the years, Microsoft lost almost every technological revolution. It lost in search to Google, mobile smartphones to Apple, social networking to Facebook, and got left behind in cloud computing to Amazon. Although Ballmer was charismatic, he also managed to kill the corporate culture. He did make a great meme however.

Enter: Satya Nadella in 2014, who successfully turned around the company culture and revived the company. In his first email to the employees, as CEO, he emphasized the focus on mobile and cloud.

Microsoft's Revenue Breakdown

Microsoft is the most well-diversified mega-cap tech companies. Its diversified in customer segments, products/services, and geography. This makes its a very unique and attractive investment vs. its peers.

Microsoft breaks down its business into three broad segments – Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. They all contribute an almost equal amount (thirds) to the top line.

Productivity and Business Processes includes its Office 365 suite for Commercial and Consumers, along with Dynamics 365 and LinkedIn. Office 365 is leading the market of productivity suites by far (i.e. 90%). Google Workspaces (recently re-branded from G-Suite) is taking some market share, but honestly I don't see it as a competitor. Office has a pretty strong "moat". Dynamics 365 is an enterprise resource planning (ERP) software, with relatively small market share in a growing category. It's arguably one of the easier implementation for an organization, which will continue to be a driver of its growth. One of the biggest growth drivers, however, in this category is LinkedIn. LinkedIn Advertising has been growing at a very impressive pace.

Intelligent Cloud is the fastest growing Microsoft Segment with Azure's cloud computing services. This has been one of the most impressive segments that Nadella focused on. Not only is Microsoft's cloud growing faster than Amazon's, its also operating at a much higher margin! This is the real "ace" in Microsoft's deck, and most important reason to hold its stock.

More Personal Computing consists of the Windows OS-related sales and services, Xbox, Bing search engine advertising revenue, and Surface sales. This would be the slowest-growing segment of Microsoft, but it does an incredibly strong moat with Windows. I, personally, think Bing has a lot of potential if they can somehow figure out how to penetrate into Google's share. Xbox, right now, is the fastest grower in this segment – likely boosted by the pandemic.

Should you buy Microsoft stock?

I am... and I'll tell you why.

The main "growth" reason (if you haven't already picked it up) is Cloud Computing; but also from a "value" perspective, its hard to argue any tech company has a more defensive offering than the Windows and Office Suite of products and services.

The only other company that comes closes, is Google. But, that stock is also in my top holdings.

It's very rare that my forecasts are above analysts' estimates – since I'm always conservative – but in this case, I'm slightly above forecasts. Based on my calculations, I believe Microsoft has a fair value of $540/share. Calculations supporting this numbers are available to premium subscribers below.

However, when I factor in compression of price multiples (which I always do), I get a target share price of $450 – which represents a 50% upside from where we are today! Enough said.

What are the risks?

I personally think Microsoft is the least at risk (of the big tech companies) for anti-trust violations as they essentially build platforms for other businesses to build on. For example, Google makes more money than Microsoft... on Windows (how ironic!).

The real risk here, for any growth company right now is the market risk and interest rates. If the Feds need to taper liquidity sooner and faster than expected, and rates rises sooner and faster than expected, it can be very ugly for all stocks – but tech stocks specifically.

I am genuinely concerned for that risk, however the risk of not participating is greater for me. Which is why I will enter with a small position, and look to add to it with any corrections. Right now, Microsoft seems to be lagging other tech stocks; so this could be a good starting opportunity.

But, of course, all this is just my opinion... and not financial advice :)