Technology

The 2016 Bullish and Bearish Outlook for Microsoft

Now that 2015 has turned into 2016, strategists and forecasters are trying to figure out what the new year will bring. The stock market may be off to the worst start to a year since 2008. Still, one week may not tell the whole tale for a year. The Dow Jones Industrial Average closed out 2015 at 17,425.03, down 2.2% for the year, and the six-year bull market may have been interrupted. Or has it?

The index performance of the Dow does not account for individual stock dividends, but Microsoft Corp. (NASDAQ: MSFT) ended 2015 at $55.48, for a total return of 22.69%, if you include its dividends.

For the year ahead, Microsoft’s consensus analyst price target from Thomson Reuters was $57.00. If the analysts are correct, the expected total return for Microsoft would be about 5.4%, including its dividend yield of 2.6%.

Since 2016 has gotten off to a very shaky start, the pullback has brought Microsoft shares down to about $52.60 after just four very negative trading days. Suddenly, that 5.4% implied gain leaves an implied total return expectation of almost 12% if the assumptions from just a week earlier hold true.

Now that Satya Nadella has taken over, Microsoft is far different from in the days of Steve Ballmer and Bill Gates. The company has been trying to win ever more in mobile, but its cloud has been a handy success story. Microsoft has streamlined operations it does not deem as being core, and its reliance on Windows update sales seems to be lessening.

The market treated Nadella’s path quite well. How does a 22.69% total return in 2015 sound versus a Dow that fell by about 2.2%? Now consider that the Nadella era stock gains took place at a time during the continued rise of Apple Inc. (NASDAQ: AAPL) and Google — now Alphabet Inc. (NASDAQ: GOOGL) — when PC sales and the desktop-only world have been in decline.


That $57.45 consensus analyst price target compares to a 52-week range of $39.72 to $56.85. That suddenly doesn’t sound too high, not if shares were already almost there. Still, Microsoft was one of the top Dow stocks of 2015.

Microsoft is valued at about 19 times expected 2016 earnings (June year-end) and about 17 times expected 2017 earnings. By 2017, revenues could be within striking distance of $100 billion — not bad for a company that many people might try to say they though did not have a great future. Microsoft has more than $100 billion in cash and liquidity in its arsenal, but much of that is overseas and would take a real penalty if repatriated under the current climate.

Another boost for Microsoft has been the Xbox One. The gaming console has become a favorite for media consumers, including cord cutters. To think that some analysts and investors thought Microsoft should abandon that effort.

Raymond James went out with a bullish call right before December, raising its rating to Strong Buy from Market Perform. Its target was raised to $62.00, and Microsoft shares were at $53.93 at that time. Merrill Lynch raised its target to $63, FBR raised its target to $60, Stifel raised its target to $58 and RBC raised its target to $57 in October.

Nadella’s performance has driven Microsoft far higher than the Microsoft bears could have ever imagined. The 2015 bullish and bearish outlook predicted only 7.3% growth in 2015, when it rose three-times that, and the 2014 bullish and bearish forecast was for a loss of 2.6%, when it ended up being one of the Dow’s top performing stocks.

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