Microsoft Corporation‘s (NASDAQ:MSFT) second act as a cloud computing company is the most promising thing to happen to Microsoft stock in … well, in decades. That makes shares look pretty attractive at current levels.
The emergence of the cloud has been a boon for old-timey tech behemoths like Microsoft. It’s a vast and growing green field of revenue opportunity for companies that are no longer at the cutting edge of technological developments. Enterprise-facing cloud services turn that threat on its head.
The risk is that MSFT has stiff competition and — like everyone else in the space — pivoting a company to depend on an entirely new revenue stream doesn’t happen overnight. As we’ve seen with other tech stalwarts, just because the cloud division is driving growth doesn’t mean it’s carrying Microsoft stock just yet.
After all, the cloud is still a minority part of total revenue. Software aimed at PCs still accounts for a hefty chunk of the top line as PC sales remain a slowly melting iceberg.
A bet on MSFT is very much a bet on the continued success of scaling up cloud services at a rapid pace, so that it can make up for the decline in the legacy business. They way things are going, MSFT looks like it has a credible plan.
Analysts at Evercore ISI rate shares “buy” with a target price of $87 in their most bullish scenario. That gives the Microsoft stock price implied upside of 45%. Here’s a summary of Evercore ISI’s investment thesis:
“Overall, we believe that Microsoft remains one of best-positioned large-cap names in the context of the broader shift to cloud, given strong momentum with the company’s Commercial Cloud offerings — namely Office 365 and Azure. In the Productivity and Business Process (PBP) business unit, Office 365 (up 54% constant currency in the fiscal first quarter) will likely emerge as the key driver of value through 2021.”
MSFT Is Delivering on Its Designs
Strange as it sounds, MSFT is actually kind of a cool company again. It’s proving to be a winner in the hottest new tech opportunity in ages. It’s actually riding the wave rather than playing catch up like it did with mobile.
It’s under-promising and over-delivering. Quarterly results are fueling investors confidence.
October was actually a watershed moment for Microsoft stock. It hit an all-time high. That is a huge deal on a psychological basis. True, this is ignoring inflation, but it was the first time MSFT got back to levels last seen in 1999. It feels like a lost decade-and-a-half is at an end.
Revenue had been in decline for five consecutive quarters as the cloud couldn’t make up for decreases elsewhere. No more. The top line actually grew in the most recent quarter thanks to sales of the company’s Azure offering. Sales from the business more than doubled year-over-year.
Microsoft has made billions in capital investments to compete with industry heavyweight Amazon.com, Inc. (NASDAQ:AMZN). MSFT remains in second place to AMZN, but all that money has been well spent. The investments are now paying off and Microsoft has ample room to leverage them going forward. We might be at an inflection point in the company’s pivot.
Certainly, Wall Street wasn’t prepared for the results: Earnings per share came to 76 cents on an adjusted basis. Analysts were looking for EPS of just 68 cents, according to a survey by Thomson Reuters. That’s a big earnings beat.
It was easy and defensible to roll your eyes when MSFT unveiled its strategy a few years ago. But it’s actually pulling it off.
The story is still unfolding and there is never an absence of risk, but MSFT stock looks like a winner.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.