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The Motley Fool: Microsoft’s Plans Are Paying Off

The Motley Fool

Microsoft (Nasdaq: MSFT) is undergoing big changes that include becoming a major player in cloud computing. In its recently reported fourth quarter, Microsoft’s intelligent cloud segment sales increased 10 percent in constant currency to $6.7 billion and helped offset headwinds from a slowing PC business, resulting in overall year-over-year companywide revenue growth of 5 percent.

Microsoft thinks it can generate $20 billion in commercial cloud revenue in 2018, and if so, that would mean some pretty nice upside for that business. Commercial cloud sales were running at an annualized $12.1 billion clip last quarter. Fueling that growth will be its Office 365 software subscription service and Azure, its app-building and management solution. Last quarter, commercial Office 365 sales surged 54 percent and Azure sales more than doubled from year-ago levels.

The company should also enjoy sales and profit tailwinds from growth in its Surface laptops, Xbox Live and internet search businesses. Surface sales increased 9 percent, Xbox Live monthly users grew 33 percent and search revenue rose 16 percent year over year last quarter.

Overall, Microsoft is generating $5.5 billion in quarterly free cash flow. With a recent dividend yield of 2.5 percent and with $100 billion in cash, it’s able to make big acquisitions and is likely to remain one of the most dividend-friendly companies in technology. (The Motley Fool owns shares of Microsoft.)

Ask the Fool

Q: Since I don’t have much money, I’m interested in investing in stocks that cost only a few dollars each, at most. Which do you recommend? - K.R., Syracuse, New York

A: You’re asking about “penny stocks,” which trade for less than about $5 per share. They’re generally best avoided, as they can be extremely volatile, risky and easily manipulated. They’ve caused many naive investors to lose most of their investments.

Fortunately, you don’t need to focus on low-priced stocks if you don’t have much money. You can buy 5,000 shares of stock for $0.50 each, only to see them fall in value, when the same $2,500 spent to buy 25 shares of a $100 stock might see it double over a few years.

A stock’s price doesn’t tell you much by itself. A $200 stock might look pricey, but if the company’s shares are really worth $300 each, it’s a bargain. Priceline’s shares recently traded near $1,400 apiece, but five years ago they were near $500.

Penny stocks entice people with the thought of owning thousands of shares. It’s not the number of shares that matter, though – it’s their health and performance.

Q: I see that Ford Motor Co.’s “volume” is 34,900,000. What does that mean? - M.T., Riverside, California

A: It means that about 35 million shares of stock traded hands in the last trading day – or perhaps that’s a three-month average. Volume can vary widely – AT&T recently averaged about 21 million shares per day, versus close to 9 million for Visa and a little more than 2 million for United Parcel Service. If a stock’s volume is much higher than its average, then something is probably going on, such as good or bad news.

My Dumbest Investment

I invested in a company that was developing lipid-based therapies to treat diseases. Many in the market didn’t think its technologies would work, some institutional investors didn’t think they worked and one of the company’s first studies failed. The company executed a reverse split of its shares, and the founder and CEO resigned. Despite all that, I not only bought shares, but sold shares in a stronger company so that I could buy more shares of the biotech outfit.

I was very, very stupid. I learned not to “average down,” adding more shares as a stock’s price sinks, and instead to add to my positions in winners. - Steve Woodward, Tallahassee, Florida

The Fool responds: This is a classic kind of penny stock to avoid. The company is still around, but it has been burning through cash while its formulas go through required clinical testing before seeking FDA approval. It just announced that it’s merging with another, more deep-pocketed company.

You’re right that it’s often regrettable to throw good money after bad, averaging down on a stock. (The term refers to the fact that your average price paid per share falls as you buy more shares at lower prices.) Beware of reverse splits, too, as they’re typically executed by companies in trouble – and you were smart to look for significant insider ownership of shares, as that means that management’s interests are aligned with yours.

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