Buy Microsoft (MSFT) Stock For 2020 On Continued Cloud Computing Growth?

Microsoft (NASDAQ:MSFT) shares have surged over 50% in 2019 on the back of its continued cloud computing expansion and stable growth from its legacy businesses. MSFT stock sits right near its highs and Microsoft remains one of only two public companies in the U.S. with a $1 trillion market cap—alongside Apple (NASDAQ:AAPL) .

With this in mind, should investors consider buying Microsoft stock for 2020?

MSFT’s Pitch

Microsoft is Amazon’s (NASDAQ:AMZN) largest competitor in the cloud space. Last quarter (Q1 fiscal 2020), its Intelligent Cloud revenue surged 27%, driven by 59% expansion in the key Azure division. This cloud growth easily topped the fourth quarter's 19% jump and fiscal 2019’s 21% cloud growth.

Cloud computing helps drive MSFT stock and remains a focus for Wall Street. But the Redmond, Washington-based firm’s other businesses, from Office and Windows to gaming and devices have evolved and expanded. Microsoft has also diversified through a ton of acquisitions, which includes big purchases such as LinkedIn (NYSE:LNKD). Looking ahead, Microsoft plans to expand its reach in everything from artificial intelligence to IoT.

Microsoft has also remained mostly out of the recent government spotlight that Google (NASDAQ:GOOGL) , Facebook (NASDAQ:FB) , and others have found themselves in—clearly MSFT already had its big day in antitrust court years ago.

On a macroeconomic level, the historic bull market could keep on rolling in 2020, as U.S. unemployment rests at 50-year lows. The Fed is also poised to keep interest rates low and the U.S. economy is expected to expand around 2.2% in 2020 (also read: Why Stocks Are Poised To Soar In 2020).

Other Fundamentals

Along with the economic picture appearing strong, which would likely benefit MSFT as its business reaches enterprises and consumers, its other fundamentals remain solid. Investors can see that Microsoft stock surged over the last two years to easily outpace Amazon. MSFT closed regular trading Wednesday just off its 52-week high at $154.37 a share.

MSFT currently trades at 27.3X forward 12-month Zacks earnings estimates. This represents a discount compared to its industry’s 29.2X average and its own two-year high of 29.9X. Its price to sales ratio is more stretched. But Microsoft returns value to shareholders through buybacks and dividends, of which it consistently raises.

The firm lifted its quarterly dividend by 11% for fiscal 2020 and its board announced in September that it approved a new share repurchase program of up $40 billion. MSFT’s annualized dividend currently yields 1.32%, which rests below the 10-year U.S. Treasury Note’s 1.92% but comes in above Apple’s 1.10%.

On top of that, Microsoft has paid down its current debt load over the last several years. Plus, the firm has started to reduce its longer-term debt, which climbed somewhat heavily after its $26.2 billion LinkedIn purchase in 2016. MSFT’s debt-to-equity ratio came in at 0.69 at the end of last quarter (down from 0.71), which comes in below Apple’s 1.01.

Bottom Line

Our current Zacks estimates call for Microsoft's fiscal 2020 revenue to pop 11.3%, with fiscal 2021 expected to jump another 11% higher to $155.51 billion. These estimates come in below the firm’s 14% growth in both 2019 and 2018 but look strong compared to 2017’s 6% climb and mark impressive top-line expansion for a company of its size and age.

Perhaps more importantly, the company’s cloud computing revenues are projected to surge another 21% in 2020 to match last year’s growth.

At the bottom end of the income statement, MSFT’s adjusted full-year earnings are expected to climb 12.6% this year and another 12.3% in 2021. On top of that, Microsoft’s longer-term earnings revision activity has trended completely upward since its last quarterly report.

Overall, Microsoft is a Zacks Rank #2 (Buy) at the moment and is part of an industry that rests in the top 20% of our more than 250 Zacks industries. Therefore, MSFT stock appears to be worth buying for 2020 even near its highs.

Today's Best Stocks from Zacks

Would you like to see the updated picks from our best market-beating strategies? From 2017 through Q3 2019, while the S&P 500 gained +39.6%, five of our strategies returned +51.8%, +57.5%, +96.9%, +119.0%, and even +158.9%.

This outperformance has not just been a recent phenomenon. From 2000 – Q3 2019, while the S&P averaged +5.6% per year, our top strategies averaged up to +54.1% per year.

See their latest picks free >>