Microsoft (NSDQ: MSFT) is not the company it once was. And that’s a good thing. This technology icon is an example of how a great company can lose its way and then reinvent itself to become stronger than ever.

Back in 2000, the dot.com bubble burst and the technology sector tanked. Bill Gates resigned as CEO soon thereafter and installed Steve Ballmer to run the place. During his tenure, from 2000-2014, Ballmer sat on his laurels and let Microsoft stock die as the company became unwieldy and unfocused.

Fortunately, Ballmer resigned and the visionary Satya Nadella took over in 2014. Nadella transformed the company’s toxic, complacent culture and made it proactive and innovative, the way it was in its early days.

And now, MSFT seems to be a growth stock again. Can the transformation stick?

Our MSFT stock prediction will examine the pros and cons of this revamped company and we’ll see what 2019 has in store for it.

What Is Microsoft?

Nadella’s accomplishment has been to transform the company into a business that generates recurring revenue, which has become the financial foundation for the company. Microsoft’s market cap currently hovers at $822.7 billion.

Nadella pushed heavily into cloud-based services, which has served as MSFT’s growth engine.

The company now operates via several major divisions.

Productivity and Business Processes handles products and services involving productivity, communication, and information services.

Office Commercial and Office Consumers handles Microsoft Office 365 subscriptions and licensing.

Microsoft acquired social media platform LinkedIn in 2016 for $26.2 billion.

Microsoft Dynamics is a business solutions suite of products.

Intelligent Cloud involves public, private, and hybrid server products and cloud services, including Microsoft SQL Server, Windows Server, Visual Studio, System Center, and Microsoft Azure.

Enterprise Services includes Premier Support Services and Microsoft Consulting Services.

The More Personal Computing division is a catch-all that offers products and services for developers, end users, and IT professionals. This is where the famous Windows software lives, along with Microsoft’s devices like Surface; gaming in the form of Xbox; and Search, such as Bing.

Notice how the words “services” shows up a lot? That move began under Nadella, as he moved items such as installed software online and made them subscription items.

How Has Microsoft Stock Performed?

What Is Microsoft’s Stock History?

• Over the past year, MSFT shares have gained 20% whereas the S&P 500 has lost 5%.
• Over the past two years, MSFT shares have gained 64% whereas the S&P 500 has gained 16%.
• Over the past five years, MSFT shares have gained 193% and the S&P 500 has gained 49%.

How Has Microsoft Stock Performed in 2017/2018?

• In 2017, Microsoft shares gained 37% whereas the S&P 500 gained 19%.
• In 2018, Microsoft shares gained 20% whereas the S&P 500 has lost 5%.

Who Are Microsoft’s Rivals?

Oracle (NSDQ: ORCL)

Data base provider Oracle has become a dominant brand name in cloud computing.

Oracle makes money from the cloud in two main ways. It sells access directly to applications, but it also provides tools to program and manage apps while analyzing data (its “platform” service).

This tech giant has successfully transitioned away from its former core offering of installed software to embrace the boom in cloud computing.

SAP (NYSE: SAP)

SAP makes products that support business intelligence and analytics. The most advanced businesses need platforms that can analyze and process live data, especially as data arrives from different sources.

The company mostly serves Global 1000 Companies that are geared towards doing business in databases, enterprise resource planning, and financial software.

SAP’s products permit extensive customization, for the creation of inventory and sales management systems.

Apple (NSDQ: AAPL)

The Cupertino, California-based giant is the legendary maker of a host of beloved consumer gadgets, including the iPhone, iPad, MacBook, and Apple Watch. Apple’s online services include the iTunes Store, iOS App Store, Mac App Store, Apple Music, and iCloud.

Apple is a technology bellwether that’s de-emphasizing its declining MacBook business to focus on smartphones, Apple services, and breakthrough technologies such as self-driving cars. Apple competes with Google in the autonomous car space.

Of course, these are only three main competitors. Several other mega-cap technology stalwarts compete against Microsoft as well.

Read This Story: Our Alphabet Stock Prediction In 2019 (Buy or Sell?)

Will Microsoft Stock Go Up in 2019 (Should You Buy?)

Nadella modernized and transformed what Ballmer had left to rot on the trash heap. A software sales company became Software-as-a-Service (SaaS). This move kickstarted Microsoft’s business model and investor interest in the company.

By making an aggressive foray into a recurring subscription model, Microsoft’s revenue is currently solid as a rock and much less subject to fluctuation.

This new subscription revenue model makes up about a third of Microsoft’s annual revenues and is headed for 50% by 2022.

Also, using the Azure product to shift into cloud-based services, Microsoft became a legitimate competitor to Amazon’s (NSDQ: AMZN) Amazon Web Services (AWS). Azure is now the unquestioned number two in the space and growing faster than AWS.

Read This Story: Our Amazon Stock Prediction In 2019 (Buy or Sell?)

Amazon is often considered a faceless entity, so in an effort to distinguish Azure, Microsoft made the brilliant move to become a true service partner to its users.

Microsoft’s financials and growth metrics are phenomenal. In the most recent quarter, Microsoft generated total revenues of $29 billion, representing year-over-year growth of 18%.

Productivity and Business Processes generated a third of those revenues. Intelligent Cloud put in 30%, and More Personal Computing offered 37%.

Even better, all three of these major divisions delivered amazing growth rates over the previous year (18%, 24%, and 15%, respectively).

MSFT has a $765 billion net-of-net-cash market cap. Trailing twelve month (TTM) net income was a whopping $48 billion (after adjusting for a higher tax bill due to the Trump tax cuts). Thus, MSFT stock is trading at about 17x trailing earnings.

Analysts project five-year annualized earnings of 13.7%. As mentioned in earlier columns, we give a 10% premium to that number for each of the following: world-class brand name (yes), significant cash hoard (yes), and/or robust free cash flow (yes; $32 billion).

So that adds 4.2 to analyst estimates, bringing us to 17.9%. MSFT trades at 17x, so it has a price-to-earnings growth (PEG) ratio of 0.95. Anything under 1.0 is a value.

Here’s a video that offers a deep dive analysis of Microsoft stock:

https://www.youtube.com/watch?v=4kNRmrZivcE

Will Microsoft Go Down in 2019 (Should You Sell?)

With the numbers we just mentioned, it’s difficult to consider MSFT as being overpriced. Let’s look at how competitors’ stocks trade.

Microsoft’s main competitors include Oracle, SAP, Apple, Alphabet (NSDQ: GOOGL), and International Business Machines (NYSE: IBM).

Each of these, except SAP and IBM, earn all three premium valuation bonuses.

Apple has a net of cash market cap of $697 billion. On $72 billion of TTM net income, it only trades at 9.5x earnings. Including the valuation bonus, AAPL’s five-year estimate is for 16.9% growth. It thus trades at a PEG ratio of 0.57, so Microsoft is more expensive compared to Apple.

Alphabet has a net of cash market cap of $665 billion. On $29 billion of TTM net income, it trades at 22x earnings. Including the valuation bonus, GOOGL’s five-year estimate is for 10% growth. It thus trades at a PEG ratio of 1.1, so Microsoft is cheaper compared to Alphabet.

SAP has a net of cash market cap of $126 billion. On $4.2 billion of TTM net income, it trades at 30x earnings. SAP’s five-year estimate is for 8.5% growth. It thus trades at a PEG ratio of almost 4, so Microsoft is far cheaper compared to SAP.

IBM has a market cap of $112 billion. On $10.7 billion of TTM net income, it trades at 11x earnings. IBM’s five-year estimate is for 1% growth. It thus trades at a PEG ratio of 11, so Microsoft is far cheaper compared to IBM.

Oracle has a market cap of $177 billion. On $11 billion of TTM net income, it trades at 16x earnings. Including the valuation bonus, ORCL’s five-year estimate is for 13% growth. It thus trades at a PEG ratio of 1.27, so Microsoft is cheaper compared to Oracle.

After surveying all of these metrics, Microsoft is only more expensive when compared to Apple.

Overall Microsoft Forecast and Prediction for 2019

What’s our final verdict on Microsoft?

The company continues to execute. In fact, it’s on fire! We see good times for Microsoft in 2019.

Since we expect a stock to follow earnings, and Microsoft is pegged to enjoy a 14% year-over-year bump in earnings in 2019, we expect an approximate 15% increase in the stock. That would put the share price at around $124 by year’s end.