NEW YORK (TheStreet) -- I recently focused onMicrosoft's (MSFT) - Get Report dividend bull thesis. I love Microsoft as a long-term dividend play but that's only part of my attraction to the software maker.
We shouldn't, but if we discount the company's dividend and focus on capital appreciation the result remains the same -- Microsoft is a strong buy. In fact, I think Microsoft will reach $50 and the company's value overshadows other tech giants Google (GOOG) - Get Report, Apple (AAPL) - Get Report and Amazon (AMZN) - Get Report. Shares currently trade around $42, up over 12% for the year to date.
Microsoft dominates the PC and laptop market. It's off to a slow start in tablets, but we've seen this movie before. Internet Explorer was slow at first and gained a leadership position. Weakness in the PC market has wrongly led many investors to believe the company is past its prime.
The fact is, despite a relatively modest increase in share price, revenue and profits continue to grow and during the past 10 years, the share price failed to rise proportionately. In other words, Microsoft is a better value now compared to 2004, not long after the dot-com bust.
Indian-born and U.S.-educated Satya Nadella, the new chief, adds renewed vigor for a company that changes CEOs less than once a decade. Previously, Nadella led the Microsoft Cloud and Enterprise group.
Nadella's ascent doesn't come as good news for Amazon. Amazon and Microsoft share the common characteristic of having multiple and distinct product offerings and revenue streams. Concerning the most to Amazon is the two tech companies overlap the most within cloud computing services. Amazon is the number one provider, called Amazon Web services (AWS), and Microsoft's Onedrive is number two.
It's a battle I believe Microsoft is destined to win. Cloud computing is closer to Microsoft's core business, and the company enjoys a distinct server software cost advantage. Linux is widely known to power the Internet but Microsoft is closing the market share gap, according to Microsoft TechNet and Netcraft. The two companies are currently in the midst of a price war while dragging Google along for the ride.
IBM (IBM) - Get Report is another major player in the cloud space. According to IBM, it's the number one cloud provider based on total profit generated from cloud-related services. IBM has resisted dropping its prices as it attempts to position its services as the top-shelf offering. The strategy could backfire and allow Microsoft to gain revenue and ultimately profit as it gains market share.
It's an approach that may only work for as long as cloud computing doesn't become a commodity -- something I believe is happening right now. Rackspace Hosting (RAX) is another large player and the most significant stock price diver lately is the hope of a takeover by CenturyLink (CTL) - Get Report.
A Rackspace takeover is a sign of a maturing market -- a market space that may soon become commodity priced. You can bet IBM is watching the developments carefully. As I write this, Rackspace shares, at $3.75, are getting crushed because confidence in a buyout is waning.
Microsoft's other gem is Xbox. Xbox enables Microsoft to remain in everyone's home even if they don't have a PC. The game platform is a leader and virtual earnings printing press.
The best way to analyze a company is through the numbers. Opinions on Windows OS's pending demise can cloud your judgment. The stock is trading at four times revenue and 15 times earnings, making the shares priced as if it will have little to no growth.
If the company does begin to spin its wheels and stagnate, there's a 2.7% dividend yield to earn while waiting for the shares to climb. That's really what it's about, the ability to buy value that others don't see.
At the time of publication the author had no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates MICROSOFT CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate MICROSOFT CORP (MSFT) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, notable return on equity, reasonable valuation levels, increase in stock price during the past year and good cash flow from operations. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Although MSFT's debt-to-equity ratio of 0.26 is very low, it is currently higher than that of the industry average. Along with this, the company maintains a quick ratio of 3.01, which clearly demonstrates the ability to cover short-term cash needs.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Software industry and the overall market, MICROSOFT CORP's return on equity significantly exceeds that of both the industry average and the S&P 500.
- Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
- MICROSOFT CORP's earnings per share declined by 5.5% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, MICROSOFT CORP increased its bottom line by earning $2.60 versus $2.00 in the prior year. This year, the market expects an improvement in earnings ($2.70 versus $2.60).
- You can view the full analysis from the report here: MSFT Ratings Report