With its 30.5 trailing P/E ratio and its $1 trillion market cap, Microsoft (NASDAQ:MSFT) stock price largely reflects its current two main growth engines: its cloud business and its software-as-a-service offerings. Consequently, investors should not expect MSFT stock to rally tremendously when it reports its fiscal fourth-quarter results after the market closes on Thursday.
Still, the growth of MSFT’s cloud business and its SaaS offerings could modestly surpass average expectations, triggering a small increase in MSFT stock.And over the medium term,MSFT has multiple, strong potential catalysts that could push MSFT stock much higher.
Microsoft’s Cloud Revenue Could Beat Average Estimates
Microsoft’s revenue from its cloud business, Azure, soared 73% year-over-year in the first quarter, and the company gained share in the still rapidly expanding cloud market in calendar Q1.
MSFT has two important drivers in the cloud market.
First, a number of foreign countries are in the early stages of adopting the cloud, giving Azure a huge new growth engine. Secondly, brick-and-mortar retailers are expanding their e-commerce businesses and taking e-commerce market share from Amazon (NASDAQ:AMZN), which has the world’s top cloud business. Given that situation, more and more of these retailers may decide to emulate Walmart (NYSE: WMT) and use Azure for their cloud needs.
Most analysts likely underestimated the combined strength of these trends, so Microsoft’s cloud revenue may surpass analysts’ consensus estimates, enabling the company’s overall results to come in ahead of average estimates, boosting Microsoft stock.
The Valuation of Microsoft Stock Is Already Elevated
But, as noted earlier, the valuation and market cap of MSFT stock are rather elevated. In fact, Microsoft stock has the highest market cap of any publicly traded company, narrowly beating out Apple (NASDAQ:AAPL) and Amazon. As a result, a great deal of cloud growth is likely already baked into MSFT stock.
In fact, just last week, Cowen analyst Nick Yako initiated coverage of Microsoft stock with an Outperform rating, predicting that the combined revenue generated by Azure and the company’s SaaS business, Office 365 could rise by $100 billion in five years. He added that the company’s revenue and earnings could easily grow by at least 10% annually over the next five years. But despite his optimism, Yako set a $150 price target on MSFT stock, meaning that he expects Microsoft stock to climb less than 10% over the next year.
That’s another indication that, even if MSFT reports stronger than expected Q4 results, MSFT stock probably won’t rise much.
Microsoft Stock Has Other Potential Positive Catalysts
During next year’s holiday season, Microsoft will release its first completely new video-game console since 2013. According to Techradar, the new console will be “the most powerful console” and “is meant to be four times as powerful” as MSFT’s current Xbox One X console. Other reports indicate that the new console will be entirely cloud-based. If it also features virtual reality and/or augmented reality and highly captivating games, it could move the needle for MSFT stock.
Additionally, over the last two years, Microsoft has stepped up its investment in Teams, its”collaboration software,” creating a battle with Slack (NYSE:WORK), which also offers collaboration software. Some say that companies will eventually use such software instead of e-mail. If that forecast proves to be accurate, Teams could spur rapidly accelerating adoption of Office 365, creating another positive catalyst for MSFT stock.
Finally, Microsoft is being considered for a a $10 billion cloud deal with the Department of Defense. The long-delayed deal is slated to be awarded late next month. After a judge recently dismissed Oracle’s (NYSE:ORCL) lawsuit related to the contract, there’s a good chance that the deal could actually be announced next month or soon thereafter. Keep in mind that Microsoft is up against Amazon. But in light of President Trump’s open disdain for AMZN, I certainly wouldn’t bet against MSFT winning the contract.
The Bottom Line on MSFT Stock
Microsoft’s Q4 results could beat expectations, but given the high valuation of Microsoft stock, they probably won’t cause the shares to climb too much. Positive catalysts, however, could boost MSFT stock over the longer term. Given these positive catalysts and the excellent performance of MSFT under its current CEO, Satya Nadella, longer-term investors should buy MSFT stock on dips.
As of this writing, the author did not own shares of any of the aforementioned companies.
