Company Profile

Microsoft Corporation (NASDAQ:MSFT), founded by the infamous Bill Gates in 1975, is a multinational American corporation that has achieved worldwide renown. Involved in software, electronics, and personal computer production, Microsoft is known for its Windows line of operating systems, the Internet Explorer web browser, and the Microsoft Office suite, among other products. Its offerings also extend to gaming technology, where its flagship product is the Xbox game console – a console that has, in its three forms (i.e., Xbox 360, Xbox, and Xbox One), sold over 197.1 million units. While its Office suite and IBM PC-compatible operating system are its truly market-dominant products, Microsoft has always placed emphasis upon branching out – alongside gaming, operating systems, and office software, it has involved itself in search engines (with Bing), mobile phones (with its Window Phone operating system, available largely on Nokia (NOK) devices), and even instant messaging (via MSN). Seeking to diversify itself further via external means, Microsoft has also been quick to make corporate acquisitions; a recent one was Skype Technologies in 2011, for $8.5 billion. All these efforts have not gone to waste: Microsoft is ranked the world’s largest software marker by revenue, and has been recognized as one of the world’s most valuable companies.

While it is clear, then, that Microsoft has its merits, it was, from 2000 to 2013, considered a sub-optimal stock. According to I Know First algorithm and other analysts, however, Microsoft’s turnaround has since been spectacular; given the company’s new CEO, mass reorganization, renewed focus on gaming and wearables businesses, strong technicals, and expansion into Indian and Chinese markets, a bullish forecast is highly plausible for Microsoft this year.

Microsoft in 2014: Positive Developments

A multitude of reasons presently exist for taking interest in MSFT. We are all aware of CEO Satya Nadella’s impact, MSFT’s massive reorganization plan, and the Nokia-job-centric 18 000 lay-off plan – all of which have been hailed by analysts as potentially beneficial to the company’s future – news of the job cuts, in fact, sent shares to a 52-week high. Where gaming growth is concerned, Microsoft’s partnership with Electronic Arts (EA) is also old news.

However, there are a few very recent MSFT developments that make for a bullish case.

Firstly, this September, in an attempt to build on an already good thing, MSFT has gone on to pay $2.5 billion for Mojang AB, the creator of Minecraft – a game that has taken the current generations of young teenagers by storm, and is being compared to the Pokémon franchise. This has been hailed as an exceptionally intelligent acquisition for Microsoft, given that Microsoft has made very few major acquisitions in the gaming world – in fact, MSFT’s last large purchase was in 2001, and went by the name of Bungie. Mojang has also been deemed a good acquisition for MSFT because of the previously-mentioned popularity with which Minecraft has taken on the world, and even the reception it has been greeted with on mobile systems. CEO Satya firmly believes we live in a “cloud-first, mobile-first world”; because Minecraft is so frequently used on mobile devices, it has the potential to help not only MSFT’s gaming division, but also the company’s mobile division.

Secondly, smartphones themselves also add to MSFT’s futuristic positive attributes, and in both the short-term and long-term horizons. In the short term, while the Windows Phone operating system still has less than 4%market share, it is up from three months ago, and at least steadily defeats BlackBerry (BBRY). Several articles have suggested that there is potential for Windows Phones to become the third player in the competitive Apple- (AAPL) and Google-dominated (NASDAQ:GOOG) (GOOGL) smartphone market. In the long term, the smartphone market still has room for growth. While it may sometimes be seen as a mature market, and even an overly saturated one, smartphone penetration is not as high as we would think: only 55% of the U.S. and loosely half of Europe make use of smartphone technologies. Further, there exist markets where mobile use is the leading way to access the Internet; MSFT is already making use of some of these, given its partnership with Huawei, but could do more in these areas.

Smartphones aside, Microsoft is branching into yet more innovative technology in the immediate future. Like NOK, GOOGL, and several other companies, MSFT has now created wearable technology: it has released a OneNote companion application for smartwatches powered by Android Wear. This application was published to the Google Play store on September 16th, and seeks to allow Android Wear users to dictate notes and view them on their watches. While the app. is far from entirely functional, it does have its positives: it is accessible via iOS, Android, Mac, and Windows, making it available to the vast majority of Android Wear users. While this application probably cannot be described as any kind of spectacular feat, it’s a sign that MSFT is interested in re-entering the wearables market – a market that MSFT previously inhabited 10+ years ago. Assuming MSFT’s next attempts at smartwatch technology go better than its first, the corporation could profit from entering the largely open wearables market.

International business development could also potentially be of help to MSFT in the future. The company has already successfully established itself in a multitude of locations. However, there is always more foreign opportunity to seize. As of this September, for example, MSFT is talking about enhancing reception for and lowering the prices of 3G- and 4G-compatible phones to be sold in India. Namely, Microsoft’s Corporate Vice President Chris Webberstated that, “We have a lot of conversations going on with operators, but specifically we are very bullish on LTE opportunity in India.” If correctly implemented, furthering customer satisfaction and outreach in India could assist MSFT, particularly because India is one of the fastest growing smartphone markets in the Asia-Pacific region.

It is clear that these new business development moves have not gone unrewarded. This year, the company’s stock is up twice as much as the S&P 500, managed to hit a 14-year high, and is now trading at price levels that it has not breached since 1999. Revenue from commercial cloud revenue has doubled to a $4.4 billion annual run rate, the Devices and Consumer segment grew by 42% to $10 billion, and the Commercial segment also grew 11% to $13.48 billion. Fiscal 2014 saw a 12% increase from 2013’s total GAAP revenue ($86.8 billion compared to $77.8 billion). MSFT’s technicalcharacteristics are also strong at the moment. Microsoft is one of only three companies to get the AAA rating – the top possible rating of credit worthiness – from Standard & Poor’s, alongside Exxon Mobil (NYSE:XOM) and Johnson & Johnson (NYSE:JNJ). Its fair valuation is also considerably attractive, and its quarterly dividend has gone up by 11%. All this is complemented by a low balance sheet risk: MSFT’s debt to equity ratio is just 26%.

This has not gone unnoticed by analysts. RBC Capital and Barclays both released their price on MSFT, Reuters analysts call the stock an outperform, and Yahoo! Finance rates MSFT a moderate buy (Figures 1, 2).

Figure 1. Yahoo! Finance analysts rate MSFT a 2.5, on average, where 1.0 is a strong buy and 5.0 is a strong sell.

Figure 2. Reuters analysts rate MSFT, on average, a 2.50 – fluctuating between an outperform and a hold. Notice that there are no sell recommendations, and very few underperforms.

Why We Are Bullish on Microsoft in the Future

Most readers, we expect, will be at least somewhat familiar with the recent events that we have outlined above. What’s also important to consider in making a bullish prediction, however, is the future of the company at hand; this is significantly less easy to pinpoint than present positives. Why, then, are we bullish on MSFT?

Firstly, there is the Mojang acquisition. Microsoft’s purchase of the company that created Minecraft – a game that is wildly popular among young teens – cost the company more than Google’s acquisition of YouTube, but it has been hailed as well worth the trouble. Presumably, Minecraft has completely taken over areas of the US, where children “discuss Minecraft in class, then go home to play Minecraft with friends, and even use YouTube to see what others are doing in Minecraft.” This popularity could mean big things for Microsoft if the company steps up to vastly enhance the game, which has not had many developments made since its creator stepped down as lead developer. If MSFT can produce a better Minecraft – and indeed, it can, given the right investment – then the future looks good for MSFT’s gaming division, which is becoming one of its larger focuses.

Secondly, there is the fact that, according to analysts, the Microsoft of the past is already gone. CEO Satya’s changes to company infrastructure have distanced the company from desktop sales and enterprise customers, have brought about innovative technologies (like the multilingual, multinationalCortana), and are making the company more competitive with GOOGL and AAPL (through initiatives like Office for iPad). All these changes have already occurred, certainly, but have massive future implications – Cortana continues to get good reviews and international updates, spreading to Canada and the UK, among others. Similarly, Office for iPad is helping MSFT enter the Google-Apple fray – a much-anticipated step which, hopefully, will allow MSFT to become the third player in that market.

While precisely what else will happen in MSFT’s future is unclear at the moment, it is evident that MSFT is targeting a mobile-first, cloud-first world. It is evident that the company is now taking bigger risks than it was under Steve Ballmer. And it is evident that these risks are paying off, and that many of them – if utilized correctly – have the potential to enhance MSFT’s future. Given the string of successes CEO Satya brought about in 2014, MSFT is not entirely revised, but it is significantly updated. With even more change planned for the future, most of which seems positive, we think there is sense in viewing MSFT as a favourable investment.

An Algorithmic Perspective

While algorithmic analysis is not to be considered conclusive, it can prove a useful tool when combined with traditional techniques.

I Know First uses an advanced self-learning algorithm based on artificial intelligence, machine learning, and artificial neural networks to predict the flow of money in almost 2000 markets from 3-days to a year. This algorithm provides traders with a trend they can use to identify when to enter and exit the market; though it may be used for intra-day trading, the predictability of this trend becomes stronger in 1-month, 3-month, and 1-year forecasts; as such, it can – when coupled with traditional analysis and careful reasoning – effectively be used to analyze the value of such stocks as MSFT. While I Know First’s algorithm should not be regarded as a stand-alone testament to MSFT’s value, the algorithm has seen an unusually high degree of accuracy, and as such is, at least, a useful complement to independent analysis. I Know First has been particularly successful in this regard: in fact, MSFT has risen by more than 26% since our last article concerning the company (which predicted a bullish signal in February 2014). MSFT was also selected as our best dividend stock based on algorithms projected for growth in 2014

I Know First also succeeded in predicting MSFT’s progress over a three-month period from June 13th through September 13th, 2014 (Figure 3).

Figure 3. I Know First successfully predicted MSFT’s strong bullish trend for three months in June 2014. I Know First’s June 13th forecast is shown on the left; MSFT’s actual performance is shown on the right. Microsoft’s ticker ((NASDAQ:MSFT)) is boxed in magenta on the left.

The new forecast generated by the I Know First algorithm, updated on September 21st, is shown below (Figure 4). Bright green signifies a highly bullish signal; light green also indicates that the forecast is bullish, but not as strongly so. Bright red, in turn, signifies a bearish forecast; correspondingly, light red indicates a bearish forecast as well, but not as negative a forecast. Each compartment contains two numbers: the strength of the signal itself (represented by the number in the middle of each box, to the right), and itspredictability (found in the bottom left corner, this is the approximate level of confidence the algorithm has in the forecast). Taking all this into consideration, the ticker symbol for Microsoft Corporation – “MSFT” – may be seen as strongly bullish in the 1-month and 3-month time frames (Figure 4).

Figure 4. I Know First’s most recent 1-month and 3-month forecasts for Microsoft. MSFT is boxed in blue, and shown to be strongly bullish. Please note that a negative predictability indicates high risk.

This bullish forecast for the short term coincides well with recent developments in MSFT’s plans, its solid yield, and its branching out into new technologies. Given analysts’ frequent “Buy”, “Outperform”, and “Hold” recommendations, and MSFT’s drastic self-improvement activities over the course of the last four years, it may be wise to carefully consider MSFT, and possibly even make a purchase.

Conclusion

While Microsoft saw a problematic decade from 2000 through 2010, the stock has definitely fared better in recent years. Specifically, MSFT’s new CEO, a massive reorganization plan, a new gaming-centric acquisition, further focus on the mobile and cloud computing markets, ventures in foreign areas, and stable technicals make MSFT a much better stock now than earlier in the 2000s. As a result, analysts are viewing MSFT more and more favorably, with recommendations averaging around weak buys. In addition, I Know First predicts that MSFT will be bullish in the 1-month and 3-month time frames. While none of these facts independently point to MSFT’s becoming an exceptionally strong buy any time soon, necessarily, it would be wise to avoid completely disregarding this stock: it does have its merits.