Microsoft Corporation (NASDAQ:MSFT) doesn’t get the attention it deserves. Instead of MSFT stock, it’s FAANG — Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc (NASDAQ:AAPL), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG).
And for as much talk as there is about Apple, Alphabet and Amazon hitting a $1 trillion market cap, why doesn’t Microsoft get the same chatter? Well, now it does.
Evercore ISI’s Kirk Materne lays out his case, giving MSFT stock an outperform rating and a $106 price target. But there’s a “visible path” to a $1 trillion market cap, he says. It would require a run up to $128 and Materne says he can see it happening by 2020.
Azure and Office365 could grow to almost $50 billion in sales by 2021, helping MSFT generate $115 billion in free-cash flow over the next three years, Materne contends.
The $106 price target implies about 25% upside from current levels. With shares already up 35% in 2017, that would mark quite the run, even if MSFT stock does take a full 12 months to get there. If investors are lucky, it will be the slow and steady growth that MSFT stock price has given us all year long.
Reasons to Be Bullish on MSFT
Microsoft’s core business gives us very consistent, steady growth. But its growth channels are becoming more and more exciting. Specifically, its Azure cloud business continues to grow with incredible speed. Last quarter clocked in at more than 90% year-over-year revenue growth. The same quarter last year generated 116% growth.
Think of it like this: 116% growth on $100 brings us to $216. If we grow that pile 90% the following year, now we have $410. Now say we have 75% growth next year, as an estimate. That brings our total to $718 after year three, after starting with $100. That’s incredible growth!
As Azure revenues continue to grow, it will make up a larger chunk of MSFT’s overall revenues. This will lead to faster overall revenue growth. But it’s not just revenue growth. Microsoft is the No. 2 player in the cloud, ahead of Alphabet and behind Amazon.
Alibaba Group Holding Ltd (NYSE:BABA) is another player in the cloud. Of the group, Microsoft has the lowest valuation. Admittedly, it has slower growth, too. But its combination of market share, growth and valuation make it an attractive selection in the cloud space.
Tax Bill
The latest tax bill should give MSFT stock price a boost, too. If Alphabet and Facebook will see an 8% boost to earnings, Microsoft should see an increase as well. While it’s hard to say how much it will benefit, MSFT will benefit to some degree.
Additionally, last quarter management told us it had some $132 billion in offshore cash. Being able to repatriate that cash will do a lot of good for Microsoft. Maybe it will be an acquisition that will fuel growth in the cloud or artificial intelligence. Perhaps MSFT will increase the rate of its buyback or possibly bump its dividend.
Heck, with more than $132 billion, it could make a few key acquisitions and return capital to shareholders.
Trading MSFT Stock Price
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Shares were treading water for about a month before taking a fall at the beginning of December, along with most of tech. After a few days though, it has recovered.
Investors who have been long for the big ride should stick with it. If MSFT can maintain this recent bout of momentum, it should push it to new highs once again.
For those not in the name, what should we do? MSFT currently trades at 22 times forward earnings estimates. Microsoft’s a hair under double-digit revenue growth and has low-double-digit earnings growth. With a 2% dividend yield and a fortress balance sheet, we’re dealing with an attractive name.
Some may argue that the valuation is too high, but again, it’s one of the cheapest high-quality cloud stocks out there. Investors looking to buy have two choices: Buy now and add on a pullback or hope for a pullback and buy then. They can also wait for a breakout over $86 to buy MSFT, if they’re using a short-term horizon.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
