Microsoft Pulls An Apple: Time to Buy MSFT Stock?

Shares of Microsoft (MSFT) popped nearly 1% Monday following news that the company is set to roll out a subscription service for Xbox that mimics how Apple (AAPL) treats the iPhone these days. The move could help Microsoft attract more users and create more customer loyalty in its gaming division, but MSFT stock looks like it might be a buy even without its latest Xbox announcement

Shares of Microsoft MSFT popped nearly 1% Monday following news that the company is set to roll out a subscription service for Xbox that mimics how Apple AAPL treats the iPhone these days. The move could help Microsoft attract more users and create more customer loyalty in its gaming division, but MSFT stock looks like it might be a buy even without its latest Xbox announcement. 

Xbox

Microsoft is set to let consumers bundle its video gaming offerings like never before. Customers can pick from either Microsoft’s Xbox One S or the more powerful and more expensive Xbox One X. But unlike before, when gamers had to buy the console outright, they will now be able to make small monthly payments.

The tech giant is offering users the ability to pick between a $34.99 a month plan for 24 months for the One X and a $21.99 per month option for the One S. The monthly payments also include an Xbox Live Gold subscription—which lets users play multiplayer games online and access free games for $60 per year—and the Xbox Game Pass. The service allows gamers to download and play games from a library of select games for $9.99 per month.

Microsoft’s idea here is pretty simple: to create more brand loyalty and more consistent revenue streams similar to Apple’s new iPhone payment model. After the two-year period, the company will theoretically be able to offer upgrades on newer models in what MSFT likely hopes is a somewhat limitless cycle.

The move also highlights the growing popularity and strength of subscription services, from Netflix NFLX to Spotify SPOT. Interested customers will, however, have to sign up at a physical brick-and-mortar Microsoft store. Plus, the company has said that its new Xbox subscription service will be offered for a limited time—which could clearly change.  

On top of this potentially game-changing Xbox subscription service, MSFT stock seems like it might be worth buying at the moment.

Business Overview

Microsoft has maintained its strong position as a software and hardware provider, while also diving into everything from artificial intelligence to cloud computing and IoT. The company has bolstered its business through acquisitions as well, which include LinkedIn and its June purchase of open source software powerhouse GitHub.

Amazon still grabs the largest portion of the cloud market at 34%, but Microsoft came in at 14%, which topped IBM’s IBM 8%, Google’s GOOGL 6%, and Alibaba’s BABA 4%, according to Synergy Research Group. Microsoft announced in the middle of July a five-year deal with Walmart WMT that will see the retail giant use MSFT’s cloud and AI tech.

Plus, Microsoft’s Intelligent Cloud revenues surged 23% in its fiscal Q4 to hit $9.61 billion—the biggest quarterly gain of its three key business units. And its widely popular Azure cloud business skyrocketed by 89%.

Stock Price Movement

Now let’s see how MSFT stock has performed over the last few years to help give investors a better idea of its current standing. Shares of Microsoft have soared roughly 150% during the last three years, which crushes its industry’s 71% climb and the S&P 500’s 45% jump.

MSFT stock has also surged 50% during the last 12 months. The company has seen its stock price cool off a bit over the last six months, up roughly 17%. But shares of MSFT are still currently trading right near their 52-week and all-time high.

 

Valuation

Moving on, MSFT stock is currently trading at 25.1X forward 12-month Zacks Consensus EPS estimates, which represents a discount compared to its industry’s 33.3X average. Yet, Microsoft has traded as low as 22.2X over the last year with a one-year median of 24.4X.

Shares of Microsoft are trading below their 52-week high of 26.9X. But investors can see that MSFT’s current valuation picture appears rather stretched compared to where it has traded over the last five years.  

 

 

Outlook

Our current Zacks Consensus Estimate is calling for Microsoft’s fiscal Q1 revenues to climb by nearly 13.4% to hit $27.83 billion. Meanwhile, MSFT’s fiscal 2019 revenues are expected to reach $122.36 billion, which would mark a nearly 11% jump.

At the other end of the income statement, Microsoft’s adjusted quarterly earnings are projected to climb by over 14% to hit $0.96 per share, while its full-year EPS figure is expected to expand by over 9.5%.

Investors should also be pleased to note that MSFT has earned 10 upward earnings estimate revisions for Q1 over the last 60 days, against zero downgrades. More importantly, the company has earned 15 full-year earnings revisions during this same time period, with nearly 100% agreement to the upside.

Microsoft’s positive earnings estimate revisions trends help the company earn a Zacks Rank #2 (Buy) at the moment.

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