Is Microsoft Corporation Heading for a Trillion-Dollar Market Cap?

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MSFT stock - Is Microsoft Corporation Heading for a Trillion-Dollar Market Cap?

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Microsoft Corporation (NASDAQ:MSFT) stock continues to gain. After a brief dip earlier this month, the MSFT stock price has rebounded to new all-time highs, and the stock now has more than tripled in just the past five years.

The stock received a recent boost from analyst firm Evercore, who on Friday projected Microsoft’s market value would reach $1 trillion within four years. That in turn would suggest an MSFT stock price around $130, depending on the pace of share buybacks over that period.

More interestingly, it appears to be the first Street mention of the $1-trillion figure for MSFT.

The target has been assigned to Apple Inc. (NASDAQ:AAPL) on a number of occasions, and many observers have predicted a race between Apple and Amazon.com, Inc. (NASDAQ:AMZN) to get to that level first. I’ve put my money on AMZN, though the potential Saudi Aramco IPO next year could value that business above the $1-trillion mark.

But Evercore makes a good case that Microsoft is a dark horse contender in the race. And with the bear case for Microsoft stock pretty much gone after fiscal Q1 earnings last month, at the least, the MSFT stock price seems likely to have more upside.

Office 365

What’s interesting about the Evercore case is that it doesn’t appear to be hugely bullish. Evercore cites Office 365 as a driver, but it admits the company likely still will lag “best in breed” offerings in key areas. For instance, Evercore doesn’t expect Microsoft to overtake Tableau Software Inc (NYSE:DATA) in analytics or Box Inc (NYSE:BOX) in collaboration.

Rather, Evercore seems to accept what I’ve in the past called Microsoft’s “second-place problem” and instead sees it as a strength. Particularly for small and medium businesses, the ease of buying a single suite of bundled products — Microsoft’s sweet spot — will outweigh the fact that certain individual offerings might lag competitors.

In addition, the focus on Office 365 suggests that the move from disc-based to cloud offerings is perhaps more beneficial for Microsoft than some observers realized (myself included).

Much of the company’s much-vaunted commercial cloud revenue isn’t really new. A good chunk of it simply comes from the shift of sales that once were made “on premise” (through software installed or pre-installed on PCs).

But Evercore’s argument — an argument increasingly supported by recent numbers — is that the sales dollars aren’t just shifting, but growing.

It’s easier for SMB customers, in particular, to book Microsoft services on a subscription basis. That in turn drives more bundling and more revenue. Evercore sees this as a major driver for earnings and the MSFT stock price. And it’s an intriguing case in the light of recent performance which supports that case.

Azure

Microsoft’s second-place problem is most acute in cloud services, where the company’s Azure platform remains a distant second to Amazon despite sizzling growth. (Azure revenue grew 90% year-over-year in Q1, for instance.) But here too, Evercore sees good news and makes another intriguing point.

The firm argues that what it calls “the Amazon ‘death star’ phenomenon” is a major risk to Amazon Web Services growth. “Amazon’s ambitions in certain industries are now having a real impact on how certain enterprises think about AWS as a potential vendor,” analyst Kirk Materne wrote.

Indeed, that change has already been seen at one major grocer. Kroger Co (NYSE:KR) has shifted its cloud spend to Microsoft and Alphabet Inc (NASDAQ:GOOGL) in the wake of the Amazon-Whole Foods deal.

Should that continue, it poses a risk to AWS growth and a potential avenue for Microsoft to pick up share. Given high operating margins in Azure — which will rise as revenue does — that provides a key potential driver for Microsoft earnings going forward.

An MSFT Stock Price of $130?

All that said, I do think Evercore’s target of $1 trillion by fiscal 2021 — the first half of calendar 2021 at the latest — looks aggressive. It would require the MSFT stock price to rise another ~13% annually, at least, for the next three-plus years.

And though I’ve admitted my past bearishness on MSFT stock was far too conservative, I’m not 100% convinced that MSFT has another 50%+ left. At the least, the economy will need to cooperate and so will the broader market.

This remains a stock with net income growth in the high single digits and a forward P/E multiple in the 21-22x range. I’m skeptical that multiple can grow much more, which in turn requires earnings growth to accelerate.

But that is a possibility, with Evercore laying out one clear path. And while 2020-2021 might be aggressive from a timing standpoint, the $1-trillion level seems realistic. I’m not sure Microsoft will get there first or even soon enough to suggest there’s much upside left in the MSFT stock price.

Still, there’s a path to that level, and that’s not something investors would have believed just a few short years ago.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2017/12/is-microsoft-heading-for-a-trillion-dollar-market-cap/.

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