Microsoft (NASDAQ:MSFT) touts a year-to-date price increase of 37.6%, but I remain bullish on the stock. Its forward GAAP P/E is still only 34.2.
Microsoft is the No. 1 company engaged in the $533-billion software industry. Microsoft 365, a software productivity suite, has 300 million subscribers.
There are more than 1.3 billion active Windows 10 devices. The dominance of Microsoft’s operating system, and office productivity suite, is why MSFT might rise again before 2021 is over. (See Microsoft stock charts on TipRanks)
Microsoft Office 2021 Is Here
The most compelling investment quality of Microsoft is its enduring leadership in on-site and cloud business software. The upcoming October 5 release of Microsoft Office 2021 could boost Q2 FY2022 numbers.
This latest Office suite is aimed at people who still prefer a one-time, lifetime-licensed purchase of software products.
The TPM 2.0-only Windows 11 update on October 5 is free. Microsoft 2021's download/boxed versions will cost $150 to $250.
Selling lifetime licenses for Office 2021 allows Microsoft to serve people and businesses who don’t subscribe to Microsoft 365. Take note, there are 1.3 billion Windows 10 users, but only 300 million paying subscribers of Office 365.
Windows 365 Is a New Catalyst
Computers that aren't TPM 2.0-compliant cannot get the free upgrade to Windows 11. Instead of buying new TPM 2.0 hardware-equipped computers, people could just rent from Windows 365.
The $31/month Windows 10 version of Windows 365 is reasonable. The cloud PC instance has pre-installed Word, Excel, PowerPoint, Teams, and Outlook.
Going forward, Windows 365 could add $3 to $5 billion in new annual revenue for Microsoft. This estimate could go higher if Windows 365 becomes available to regular Windows customers.
Microsoft Is Undervalued
Microsoft’s stock has cheaper valuation ratios than its Software-as-a-Service peers. MSFT only has a TTM P/E ratio of 37.1x. This is lower than Adobe (NASDAQ:ADBE) at 51.8x, Autodesk (NASDAQ:ADSK) at 48.4x, and Salesforce (NYSE:CRM) at 103.8x.
(Source: Motek Moyen)
The lower appraisal of MSFT is unjust. Microsoft touts a net income margin of 36.5%. Salesforce’s net income margin is only 10%. The TTM net income of Microsoft is $61.3 billion, much higher than Salesforce’s $2.35 billion.
MSFT's Piotroski F score is 8, signifying that it is very strong financially, and presents excellent value.
Wall Street’s Take
The consensus among Wall Street analysts is that Microsoft is a Strong Buy, based on 23 unanimous Buy ratings. The average MSFT price target is $334.55, implying 11.7% upside potential.
Conclusion
The relative undervaluation of Microsof makes it an intriguing investment, as its dominant operating system and office productivity suite practically guarantee its long-term prosperity.
Disclosure: At the time of publication, Motek Moyen did not have a position in any of the securities mentioned in this article.
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