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The Future of Microsoft Stock Rests in the Cloud, Not on the Surface

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Microsoft (NASDAQ: MSFT ) stock continues moving higher. It trades near record highs as the company becomes a leader in the cloud. New product releases have again brought attention to the company. With its historical dominance in the PC market and its emerging leadership in the cloud industry, MSFT stock should continue its ascent as the company deploys resources and innovations to remain one of the titans of the tech industry.

Earlier this week, Microsoft announced the coming release of new products. The Surface Pro 6 is the latest in its detachable two-in-one devices, laptops that can change into tablets. It will also sell its own set of noise-canceling headphones that will compete as Sony (NYSE: SNE ) and Bose , among others. MSFT stock rose to record highs on this news.

How these products perform obviously remains to be seen. However, I think they will show that Microsoft continues to influence the tech industry. MSFT re-emerged under the leadership of CEO Satya Nadella, resurgence that's particularly apparent in the cloud. I now see this as the cloud stock to own despite AWS from Amazon.com (NASDAQ: AMZN ) holding a larger market share.

Nadella Shifted Focus From the PC to the Cloud

MSFT stock continues marching higher. In fairness, the company had begun to increase in value before Mr. Nadella stepped into the CEO position in February 2014. However, choosing the leader of the cloud division to head the company proved to be a fortuitous decision. Under his leadership, the company has shed its image as a company profiting from a declining monopoly into a dynamic leader in the tech industry.

As a result, MSFT stock has tripled in value since he took over. Despite trading at 52-week highs, I do not think Microsoft has finished rising. Thanks in large part to Azure and cloud products such as Office 365 and Dynamics 365, profits have and will likely continue to grow at double-digit rates.

MSFT stock is profitable, yet reasonable

Although Microsoft profits in no small measure from the cloud, its valuation has stayed below the stratosphere. The company trades at a forward price-to-earnings (PE) ratio of 26.6. Despite its support of a PE that comes in slightly above the S&P 500 index averages, it remains reasonable for a cloud stock.

Best of all, if sentiment regarding the cloud turns negative, MSFT stock will become an even better buy on such a pullback. Microsoft should gain market share as smaller players sell out and close their doors. Moreover, with a cash hoard of nearly $134 billion, it can buy out those competitors that it doesn't knock out.

On the financial front, the company also announced a dividend increase . MSFT stock will now pay its shareholders 44 cents per share every quarter. This represents the 14th consecutive year the company has increased its dividend. With a yield slightly above 1.5%, investors will likely not rush into Microsoft stock for the dividend. Still, this shows a major shift in thinking for a company that scoffed at the idea of paying a dividend in the 1990s.

The dividend also serves as a reminder that Microsoft has become a larger, mature company. Due to its size, MSFT stock doubling from this point will push the market cap to close to $1.8 trillion. No company has attained such a value as of the time of this writing. As such, MSFT stock will do more to keep investors rich than to get them there. Still, MSFT should continue to perform despite its large size.

The Bottom Line on MSFT Stock

MSFT stock moved higher as the company released its latest version of its Microsoft Surface and a set of headphones. How it will compete in these markets remains to be seen. What is known is the company's success in the cloud. Microsoft's cloud products show the PC era no longer defines the company. The latest release of the Surface could enhance Windows 10 sales and bolster its one-time core offering. However, to focus on the future of Microsoft, investors should look up to the cloud and pay less attention to the Surface.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You canfollow Will on Twitterat @HealyWriting.

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The post The Future of Microsoft Stock Rests in the Cloud, Not on the Surface appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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