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Stocks  | March 28, 2019

Microsoft (NASDAQ:MSFT) is definitely one of the companies that every investor should have in their portfolios. After a change of leadership and vision under CEO Satya Nadella, Microsoft stock finally lived up to its potential. Delivering robust gains over the past few years, the vaunted tech firm also pays a meaningful dividend.

For these and other reasons, I have generally been bullish about MSFT stock. However, all good things must come to an end, or in the markets’ case, a correction must arrive eventually. After Microsoft stock skyrocketed once again – it’s already up 16% year-to-date – it’s time to think more defensively.

In late January of this year, the tech firm disclosed disappointing fiscal second-quarter results. Although on paper MSFT’s earnings per share came in above analysts’ consensus outlook, management provided conservative guidance. Among the key headwinds cited by MSFT were weak Windows 10 sales and tough market conditions for PCs.

As InvestorPlace’s Chris Lau reported, the Microsoft stock price at the time didn’t receive its usual post-earnings bump. However, that situation changed dramatically over the past two months. I have concluded, therefore, that Microsoft stock has gotten ahead of itself, especially with global economic concerns returning to the forefront.

At the same time, I wouldn’t dismiss MSFT stock entirely. While its nearer-term outlook appears questionable, I remain confident about Microsoft over the long haul for three reasons:

Progress in the Cloud Boosts Microsoft Stock

Thanks to management’s persistence and subsequent successes, Microsoft stock will always be at least partially associated with physical hardware. However, the bulk of the company’s revival was due primarily to next-generation ventures. One of them, of course, is the cloud.

Microsoft Azure, the company’s cloud business, has made substantial progress since its introduction. Moreover, the platform benefits from natural synergies. As a software and operating-system giant, MSFT knows how to deliver effective, intuitive products and services. That is a net positive for Microsoft stock as management invests significantly in the company’s cloud ventures.

However, a key criticism of MSFT is that Amazon (NASDAQ:AMZN) enjoys a decisive lead in this arena. Based on the latest read, Amazon controls 35% of the cloud-computing market. Microsoft is a distant second place at 15%, while Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and International Business Machines (NYSE:IBM) both have 7%.

But as I mentioned earlier, Microsoft is persistent. So while Amazon dominates the market, Azure is growing more quickly than any of its competitors. In turn, this growth has caused some analysts to forecast that MSFT can win  a coveted military contract for implementing a secure cloud network.

Of course, if MSFT wins the deal, upsetting AMZN, Microsoft stock price will jump. But in some ways, MSFT has already won. It proved that it can compete effectively with AMZN.

If investors give MSFT enough time, they’ll likely see the potentiality of Azure translate to real profitability.

Hardware Is Still a Positive for MSFT Stock

With all the attention given to the cloud, we sometimes forget that Microsoft stock is still levered to a hardware business. Unlike other device manufacturers, though, MSFT has demonstrated viability in this channel, particularly with its Surface tablets. Better yet, management expects the company’s hardware sales to remain strong.

Usually, I take companies’ guidance with a huge grain of salt. But I have no problem trusting MSFT’s guidance because I own both Microsoft and Apple (NASDAQ:AAPL) products. If push comes to shove, I’ll pick Microsoft over AAPL any day of the week, month, or year.

That’s because Microsoft’s PCs and its associated software are intuitive and practical. I cannot say the same thing about Apple’s products. While you can do almost everything on an Apple iPad that you can with a PC, the real question is, why would you want to?

I’ve tried creating spreadsheets on an iPad and it’s a huge pain. That’s to be expected, since it’s a tablet. However, I’ve attempted to create spreadsheets on a Mac computer as well, and its performance was only marginally better than the iPad.

Microsoft stock price benefits from the fact that the company knows what professionals want because it has served them for decades. I’ve yet to work for an organization whose operating system of choice was made by Apple. Therefore, I anticipate that Microsoft will benefit from strong hardware growth, as its management has emphasized.

Don’t Overlook Gaming’s Impact on Microsoft Stock

Finally, we’ve got to talk about video games. For the longest time, this segment was viewed as being dominated by two products:  Microsoft’s Xbox, and Sony’s (NYSE:SNE) PlayStation.

However, with Amazon and Alphabet both entering the fray, the gaming sector just got more crowded. Critically, though, the latter two names hope to disrupt Microsoft and Sony by sidestepping the console format altogether.

More specifically, AMZN and GOOG are moving video games to the cloud. And in theory, that makes perfect sense. By offering a “console-less” solution, Amazon and Alphabet can help save consumers money.

But this is one area where Microsoft, like Sony, has a moat. Both console giants have substantial experience in delivering attractive content. In addition, they own lucrative licenses that the  two newer competitors can’t touch.

Moreover, the console is far from a threatened species. As games become more data-intensive,  dedicated consoles cut down on latency issues. Plus, internet networks don’t yet have uniform speeds, and therefore, they don’t provide uniform experiences.

Streaming games is an interesting concept. But right now, the technology isn’t quite ready to substantively disrupt MSFT or Microsoft stock.

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