Microsoft Stock Is Worth the Premium as the Cloud Megatrend Continues

Microsoft (NASDAQ:MSFT) can seem to do no wrong. It’s as if the company has returned to its glorious past. Microsoft stock is up nearly 11% already for the year, despite market turbulence. In fact, for the past three years, the average annual return was an impressive 41%.

Microsoft Stock Is Worth the Premium as the Cloud Megatrend Continues

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The latest quarter definitely highlighted the strengths of the business. Revenues increased by 14% to $36.9 billion and earnings came to $1.51 per share, up from $1.08 per share during the same period a year ago. The analysts’ consensus was for revenues of $35.7 billion and earnings of $1.32 per share.

As for the guidance, Microsoft announced that fiscal third quarter revenues will increase by 12% to 14% or $34.1 billion to $34.9 billion. Wall Street analysts, on the other hand, were looking for $34.11 billion.

For the most part, Microsoft indicated some conservatism with its guidance because of the unpredictability of the coronavirus.

Here is just a sampling of the plaudits:

  • Wedbush analyst Daniel Ives: “In 20 years of covering Microsoft MSFT, +1.42% we have seen a lot of good quarters, but last night was a masterpiece that in our opinion might have been Redmond’s best performance we have seen and one for the earnings history book.” He increased his price target from $195 to $210.
  • Bernstein analyst Mark Moerdler: “This was again another strong quarter as Microsoft continues to deliver Commercial Cloud growth as well as growth in numerous other areas. The cloud story continues to be very strong…probably surprising many investors.” He raised his price target from $174 to $203.

The Cloud

Yes, when it comes to Microsoft, the main driver for success is the cloud story. Now it’s true that the company was late to this opportunity, as was the case with many other mega tech operators like Oracle (NYSE:ORCL), IBM (NYSE:IBM) and SAP (NYSE:SAP).

Yet Microsoft has demonstrated much determination and focus in catching up. It certainly helps that the company had some key advantages, such as a global brand, a massive customer base, a powerful infrastructure and a talented workforce.

Part of the strategy has been about smart acquisitions. There was the deal for LinkedIn which also has been helpful in bolstering the CRM (Customer Relationship Management) business. Then there was the deal for GitHub. It’s the main repository for code and has an extensive ecosystem.

Next, Microsoft has done extremely well retooling its legacy software like Windows and Office. But there has also been innovation with new applications, such as Teams (there are more than 20 million active daily users).

And finally, Azure has turned out to be a worthy competitor to Amazon’s (NASDAQ:AMZN) AWS. This hosting platform saw a 62% surge in revenues during the latest quarter. As a testament to the prowess of Azure, Microsoft was able to snag the hotly contested bid for the Pentagon’s $10 billion cloud contract.

Keep in mind that Azure continues to see significant innovation. For example, you can conduct sophisticated AI (Artificial Intelligence) tasks, which essential for many customers. There are also functions to help with edge computing, multi-cloud/multi-edge environments and quantum systems.

Bottom Line on Microsoft Stock

During the earnings call, Microsoft CEO Satya Nadella had this to say:

“Tech spend as a percentage of GDP is projected to double over the next decade. At Microsoft, we are focused on building the most differentiated tech stack to enable every organization in every industry to build their own digital capability and tech intensity, with a business model that is trusted and aligned with their success in this new era.”

It’s a very compelling message. The business is also scaling nicely as there was a year-over-year increase in gross margins by 5 points.

So while Microsoft stock is pricier nowadays, it deserves the premium. But more importantly, it does look like the cloud opportunity has much room to go and that the company is nicely positioned to be beneficiary.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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