Microsoft (NASDAQ:MSFT) stock continues to flirt with record highs. Its recent victory in gaining a contract from the Department of Defense (DoD) seemed to confirm its strength in the cloud industry. This, in addition to other gains, have led to a long-term bull market in Microsoft stock.
The bull case for MSFT stock remains to this day. However, with Microsoft beginning to come close to averages, those wanting to get into MSFT should consider making a decision before it evolves into a hold.
MSFT stock is seeing its best times since the end of the PC-era. It recently moved to record highs as the DoD awarded the so-called “war cloud,” otherwise known as Joint Enterprise Defense Infrastructure (JEDI), to the Redmond, Washington-based software giant.
This should surprise few as President Donald Trump has criticized Jeff Bezos and Amazon (NASDAQ:AMZN) in recent months. Many will say that this redefines Microsoft as a cloud company. Certainly, investors will drive Microsoft stock up or down based on the cloud. Moreover, our own Wayne Duggan believes that the $10 billion contract for JEDI will bring further business that greatly exceeds that figure. I agree.
Microsoft belongs on the FAANG index. As many know, Microsoft is only one of two companies that holds a AAA credit rating from Moody’s. The other company is Johnson & Johnson (NYSE:JNJ). However, since that company could lose that rating soon, this arguably makes Microsoft stock the safest individual equity in existence. If these attributes do not justify it becoming a FAANG, I do not know what will.
The problem for Microsoft stock hinges on investors having discovered this recovery. The company continues to beat the curse of becoming average, at least for now. The PE ratio remains the area where MSFT stock holds on to its bull case. MSFT maintained an average price-to-earnings (PE) ratio of almost 34.7 over the last five years, well above the current 23.8 forward PE ratio. Still, the forward PE places the company near the S&P 500 average of 22.8.
Income-oriented investors will like that the payout has risen for 15 straight years. Also, considering the future of the cloud, I expect it will attain the 25 years needed for dividend aristocrat status. However, the yield of around 1.4% falls short of the current 1.87% average.
Unfortunately, bulls may have few reasons to buy Microsoft stock other than the PE differential. At a $1.09 trillion market cap, the size of the company makes high-percentage growth rates more difficult. Analysts believe the company can maintain average annual profit increases of 14.5% for the next five years. While many will consider that robust growth, it falls short of average earnings increases for the S&P 500, currently at 16.42%.
Investors may soon run out of reasons to buy Microsoft stock. With its AAA credit rating, MSFT arguably remains the safest individual stock in existence. Furthermore, its success in cloud computing should ensure this safety for years to come. Winning the contract for the war cloud confirms this.
The current Microsoft stock price of just over $144 per share implies a forward PE ratio of about 23.7. While this comes out slightly ahead of S&P averages, it significantly lags its own average. For now, the bull case in Microsoft stock begins and ends on valuation. However, outside of this differential, it has become a hold, or at best a “keep you rich” stock. Although dividends and profit growth remain respectable, they lag the S&P 500.
For now, MSFT stock is a buy. But with every tick higher in the Microsoft stock price, the buy window closes just a little bit more. MSFT equity remains an excellent choice for safety and a little bit of income. However, those who want to buy for growth should either buy now or look to other stocks.
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