Microsoft (NASDAQ:MSFT) reports its Q4 earnings on July 18, and expectations are high. Its market cap of $1.06 trillion makes Microsoft the most valuable publicly traded U.S. company, and MSFT stock has been up 37% this year. Microsoft stock closed at an all-time high of $138.90 on Friday, repeating that performance on Monday — after breaking $139 early in the day. Despite the record highs, many analysts think there is still room for growth, with some now calling for MSFT to hit $150. Here’s what has investors excited about Microsoft.
MSFT Stock Continues Its Meteoric Climb
For much of 2019, Microsoft news has been largely focused on the company’s rise in value. Not that long ago, MSFT was dismissed as a tech dinosaur that completely bumbled the smartphone — the most important device in the past decade, and the product that drove Apple’s (NASDAQ:AAPL) rise to the top. The PC market has been on a long, slow slide and with it goes Microsoft’s Windows and Office revenue, along with MSFT stock. At least that was the thinking…
However, that hasn’t been quite the way things have played out. 2019 has seen Microsoft stock continue its relentless growth. In April, the company’s market cap hit $1 trillion for the first time ever, and with yet another all-time high close of $138.90 MSFT is currently worth $1.06 trillion. At the moment, it’s the only American company in that lofty trillion dollar club, with Apple currently worth $944.19 billion and Amazon (NASDAQ:AMZN) at $995 billion.
Many investors remain bullish on MSFT, despite its record high valuation. In fact on Thursday, Cowen gave Microsoft an outperform rating and set a price target of $150 for Microsoft stock.
Bets on the Cloud and Professional Networking are Paying Off
One of the keys to Cowen’s bullish outlook on MSFT is the company’s investments in cloud computing. Microsoft’s Azure cloud service posted 93% revenue growth in Q3, and the company has been steadily gaining market share in the cloud computing market. According to numbers from Canalys, MSFT Azure’s global market share hit 16.5% in Q4 2018. Amazon Web Services continues to be the undisputed leader with a 32.3% share, but Azure’s rate of growth is significantly higher at 75.9% for 2018 compared to 46.3% for AWS.
That Azure investment doesn’t just mean revenue for Microsoft, it also makes initiatives like the company’s new gaming cloud division possible. That technology will see MSFT’s xCloud streaming game service launch this fall.
Analysts also see revenue growth potential in Microsoft’s ownership of professional networking site LinkedIn. That division saw 27% revenue growth in Q3. And Teams — Microsoft’s answer to Slack (NYSE:WORK) team collaboration software — overtook Slack in July, with over 13 million daily users.
Gaming and Surface Continues to Grow, While Windows Keeps Chugging
Windows and Office seemed to be well past their best-before dates with the decline of PC sales. However, the computer market is still far from dead and the company is able to sell Windows licenses for legacy machines as well as new models hitting the market, and that resulted in Windows OEM revenue being up 9% in Q3. Pushing a subscription model for Office has also paid off, with Office commercial and consumer revenue both showing healthy growth.
Microsoft’s investment in Surface hardware has also helped to boost MSFT stock, with Q3 revenue growth of 21%. The company’s gaming revenue has also been up this year, despite a relatively poor showing for the Xbox One compared to competing game consoles in this generation. With the xCloud streaming gaming service expected later this year, and the new Xbox Project Scarlett game console due to launch in 2020, that gaming division should see revenue growth ramp up considerably.
We’ll see in two days whether Microsoft has been able to maintain the momentum it’s showed so far this year. If those Q4 results are as good as expected, Microsoft stock could very well be on the path to Cowen’s $150.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
