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By Rodney Nelson | 05-02-2016 08:00 AM

Transformed Microsoft Offers Opportunity

The software giant's move to more collaborative ways has set the stage for long-term success.

Despite some trials over the last decade, we believe Microsoft is on a course for long-term success under the direction of CEO Satya Nadella. The firm has ditched many of its staunch, closed-off ways of the past in favor of a more collaborative Microsoft that should yield both a richer experience for its customers, and stronger returns on invested capital that support the company’s wide economic moat.

We believe Microsoft’s embrace of a cloud-first, mobile-first world has been reflected in the firm’s product offerings, which we think will help offset declines in some of the company’s legacy businesses. The most crucial of these ventures is the Microsoft Azure public cloud solution. This service offers on-demand compute, storage, and development tools for software developers and enterprises to build and run crucial applications for their employees and customers. Microsoft has invested heavily in building out data centers to meet surging demand in this market, and we think the firm is the clearly established second-largest player in this space behind only Amazon Web Services.

Microsoft’s remaining cloud exposure is heavily invested in Office 365, Dynamics, and other enterprise-focused software applications. We think Office 365 will slide into the dominant position long held by the legacy on-premises version of Office, remaining the most widely used productivity suite in the world. Further, Dynamics has become a competitive CRM and ERP platform that competes toe-to-toe with the likes of Oracle, SAP, and Salesforce.com.

In terms of valuation, we think shares of Microsoft represent an attractive investment opportunity relative to our fair value estimate. At current prices, this would represent roughly 20% of upside, and the firm’s dividend yield stands at roughly 3%.

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