In a highly anticipated move, software giant Microsoft Corporation (NASDAQ:MSFT), which unveiled a major reorganization on Thursday aimed at boosting its cloud position, is taking the axe to about 3,000 salesforce-related jobs.

The layoffs, which amount to less than 10% of the company’s total sales force (Microsoft has 71,000 employees in the U.S. and 121,000 worldwide employees), suggests the company is rethinking how it pushes its cloud-services product, Azure, which competes with Amazon.com, Inc.’s (NASDAQ:AMZN) market-leading Amazon Web Services (AWS) platform.

But Microsoft CEO Satya Nadella doesn’t want to play second fiddle to Amazon indefinitely.

Microsoft’s Cloudy Strategy Is Now Clear

Strong execution and demand for its cloud-based services drove MSFT’s commercial cloud to an annualized revenue run rate to more than $15.2 billion in the fiscal third quarter.

And with Azure revenue still accelerating, up 93% in the most-recent quarter, combined with the 11% rise in Total Intelligent Cloud revenue — thanks to 15% growth in server products and cloud services — now’s the ideal time to mash the accelerator.

As such, software as a service, platform as a service and infrastructure deserves to be even more central to Microsoft’s focus.

And given the positive profit trends the company has realized from other similar restructuring, owing MSFT stock now makes plenty of sense.

Brad Reback, an analyst at Stifel Nicolaus, who has a Buy rating on MSFT stock and a $73 price target, noted that the restructuring will “better align its [Microsoft’s] go-to-market efforts around solving more strategic digital transformation initiatives” and it is ‘another lever that should help Microsoft grow gross margin dollars faster than opex dollars’.”

That’s another way to say the MSFT’s profit margins and operating cash flow are poised to climb.

In other words, while the shares have pulled back recently from around $73 to $68, amid the recent selloff in tech, driven by valuation concerns, it’s tough to ignore the current and future value in MSFT stock.

Once tied to the fledging PC market, Microsoft has staged an impressive turnaround and it can still deliver some 15% returns in the next 12 to 18 months on its way to $80 per share.

Reasons to Bet on MSFT Stock

The Redmond, Washington-based tech giant will report fourth-quarter fiscal 2017 earnings results in a couple of weeks. Wall Street expects Microsoft stock to earn 71 cents per share on revenue of $24.26 billion, translating to year-over-year growth of 2.89% and 7%, respectively. For the full year, earnings are projected to rise 8.6% year-over-year, while revenue of $96.24 billion would rise 4.5%.

Based on current-year estimates, MSFT stock is priced at 21 times earnings, versus a price-to-earnings ratio of 18 for the S&P 500 index. While this means the stock is not a bargain, these shares could nonetheless command a higher multiple if the company is valued on its cloud-first strategy. Not to mention the fact that current estimates could now be too low given the estimated $474 million or 6 cents per share Stifel Nicolaus expects Microsoft could save from the restructuring.

And with worldwide spending on cloud computing services expected to grow to $195 billion by 2020, according to technology market research firm IDC, MSFT — the world’s largest software company, which also pays a solid annual dividend yield of 2.2% — is showing no signs of slowing down.

Bottom Line on Microsoft Stock

Investors who are looking for a potential breakout candidate, offering the combination of revenue growth and a solid dividend should look no further than MSFT. While consensus 2018 estimates of $3.32 per share calls for roughly 10% EPS growth next year, there’s now evidence that these estimates could be revised higher to around $3.38 to $3.40. As such, the forward multiple could climb too, meaning a higher Microsoft stock price.

And with some $121 billion in cash on the balance sheet, which can fuel more acquisitions, buybacks and dividend increases, MSFT stock is not only a safe haven amid valuation concerns, it can also be a growth stock by virtue of its growing cloud prowess.

— Richard Saintvilus

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Source: Investor Place