Cloud Strength Puts Microsoft Stock On Track For $200 And Long-Term Buy

Strong Q3 numbers underscore a Microsoft's cloud growth narrative that's far from over

Cloud computing giant Microsoft (NASDAQ:MSFT) finally hit a $1 trillion market cap for the first time after the company reported very strong third-quarter numbers that smashed expectations across the board. This latest pop in MSFT stock bring its year-to-date gain to nearly 30%, its 12-month gain to nearly 40%, and its five-year gain to 225%.

Cloud Strength Puts Microsoft Stock On Track For $200 And Long-Term Buy
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In other words, five years ago, Microsoft was a ~$300 billion company. Today, it’s a trillion dollar enterprise.

How did Microsoft stock more than triple to to a $1 trillion valuation in just five years? The cloud. Broadly speaking, Microsoft aggressively pivoted its business from on-premise solutions, to cloud solutions, and in so doing, unlocked a tremendous growth opportunity that the Redmond, Washington company has been capitalizing on for several years.

Net result? Big revenue growth. Big profit growth. And a red-hot MSFT stock with cloud-powered sustainable strength.

It’s increasingly clear that the global cloud market is still relatively early in its growth narrative, and that Microsoft is only expanding its leadership position in that secular growth market. As such, the company is positioned to keep reporting robust revenue and profit growth for the foreseeable future. That combination will ultimately keep MSFT stock on a winning trajectory.

True, valuation friction will rear its ugly head from time to time. That may even happen here around $130. But, in the big picture, its gains in cloud computing market share put MSFT stock on path toward $200 in the long run, making this stock a solid pick for any buy-and-hold, long-term investor.

Q3 Numbers Underscore Secular Cloud Strength

Broadly speaking, Microsoft’s Q3 numbers did exactly what I expected them to: reinforce that the cloud growth narrative remains as vigorous as ever.

As I pointed out in an April 18 earnings preview, Microsoft’s cloud growth narrative hit a small road-bump earlier this year when the company reported second quarter numbers that were largely underwhelming. Specifically, those numbers pointed to a material slowdown in the company’s revenue and profit growth rates, led mostly by a slowdown in the cloud business. But, revenue and profit growth re-accelerated in Q3 2019, and management called for continued healthy revenue and profit growth both next quarter and next year.

In other words, Microsoft affirmed with Q3 earnings and a strong guide that the Q2 slowdown was a temporary hiccup due to ephemeral economic weakness. That weakness is now in the rear-view mirror, so going forward, cloud growth rates should remain vigorous.

So long as they do, Microsoft’s overall revenue and profit growth rates will likewise remain vigorous. Ultimately, that should keep MSFT stock on a winning trajectory.

Long-Term Upside Is Healthy

Owing to upside in the cloud business, MSFT stock is on track to hit $200 in the long run.

The key to the bull thesis on MSFT stock is that only 20% of enterprise workloads have moved to the cloud. Eventually, that number will move closer to 100%, because the advantages of cloud computing are simply superior to on-premise solutions across a number of factors, including price, convenience, accessibility and uniformity.

Consequently, one could easily say that the global cloud growth narrative is only 20% complete. That means that Microsoft’s secular growth drivers powering robust improvements in Azure, Office 365, and Dynamics 365 will persist for a lot longer. So long as they do, Microsoft’s revenue growth will likely remain north of 10%.

As such, Microsoft projects as a double-digit revenue grower for the next several years. Concurrently, cloud margins should improve as the cloud businesses scale, and that will lead to a boost to Microsoft’s overall margin profile. Thus, Microsoft’s double-digit revenue growth over the next several years will be accompanied by healthy margin expansion.

Ultimately, I think Microsoft can do about $10 in earnings per share by fiscal 2025. Based on a growth average 20x forward multiple, that equates to a fiscal 2024 price target for MSFT stock of $200. So, in the long run, cloud strength puts MSFT stock on a track towards $200.

Bottom Line on MSFT Stock

The big story over the past few years is that cloud strength has consistently driven upside in the numbers and Microsoft stock. Strong third-quarter numbers confirm that this story won’t change anytime soon. Over the next several years, cloud strength will persist. So will robust revenue and profit growth, and the long-term uptrend in MSFT stock.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 

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