The novel coronavirus has been nothing but bad news for most major companies, but this narrative played out a little differently for tech giants. While the rest of the economy tanked, companies like Microsoft (NASDAQ:MSFT) thrived amid the chaos and even saw a surge in the demand for their stock. This led many investors to seek refuge in Microsoft stock’s stability in an uncertain environment.
With an amplified demand for its shares and a market cap of $1.5 trillion, analysts predict that Microsoft’s stock could emerge from the crisis stronger than ever. All arrows point to staying bullish on this tech giant.
The Road to $2 Trillion for Microsoft Stock
In what can only be referred to as history in the making, on June 10, Microsoft hit a valuation of $1.5 trillion. The company achieved this milestone together with its longtime rival, Apple (NASDAQ:AAPL) — making each the most valuable companies in the world. All four tech titans of Silicon Valley: Microsoft, Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook (NASDAQ:FB) now have a valuation of over $1 trillion.
While achieving this market capitalization is by no means an easy feat, Microsoft has always strived to reinvent itself. In the past decade, the company saw a major turning point with its cloud computing business. The growth of this already successful division was amplified by the pandemic when people all over the world made the shift to remote work. This allowed the company to rack up some serious revenue in Q3.
With a $1.5 trillion market cap in the books, the race to $2 trillion lies ahead. According to Wells Fargo securities analyst, Philip Winslow, the company will make some strategic moves in the coming years to achieve this goal.
Microsoft needs to keep up its current growth momentum of 14%, while leveraging the cloud segment. This should be done in tandem with generating free cash flow (FCF) of 17% and increasing the current earnings per share. Not only will this result in double-digit revenue growth for the company, but it will also help them achieve a valuation of over $2 trillion.
Although Microsoft will hit a $2 trillion valuation in the next few years, they need to innovate quickly and remain disruptive in order to get there first. The company is likely to go head to head with Amazon for the reigning title but the race to the finish line is just a waiting game.
Microsoft Embraces the Cloud
Prior to the pandemic, Microsoft’s cloud computing business provided decent returns, but was quickly losing its allure to Amazon’s web services. However, things took a turn for the better when the pandemic made remote working the new normal. Microsoft Office saw a dramatic surge in demand as its Teams application hit 75 million subscribers with increased usage of its cloud computing services.
This helped Microsoft gain an advantage over its competitors and the tech titan reaped some major revenue from the cloud segment. The company’s Q3 revenue from this segment was $13.3 billion which was a 39% increase in a year-over-year comparison. As many companies continue to work remotely, the revenue from this business unit will only continue to increase.
Although Amazon still holds the majority market share for cloud computing, new innovations to Azure (Microsoft’s cloud system) could soon leave them trailing behind. In 2019, Amazon saw a decrease in their share at 32.4% from 33.24% the year before. Thanks to a digital work environment, Microsoft stock is well-positioned to make some big gains from cloud software.
Dividends Stay Strong
In addition to earning its title as one of the most valuable companies in the world, Microsoft also provides investors with steady dividends. The company’s resilient business model has allowed it to thrive amid all the chaos. Microsoft reported a 23% increase in growth in EPS last quarter followed by a 27% increase in Q3. Given their strong cloud computing segment, this value will only continue to grow.
In the past five years, Microsoft has reported a 65% increase in their dividends. While this is a substantial surge, some investors still remain skeptical, given the company’s 1% dividend yield. While this may not be too high, it is still better than Microsoft’s counterparts like Amazon and Facebook that don’t pay dividends.
As Microsoft emerges from the other side of the pandemic, stronger than ever before, its high growth earnings and consistent dividends make this stock a worthy investment.
The Bottom Line on Microsoft
The future is bright for Microsoft stock. With a successful $1.5 trillion valuation in its docket and rosy predictions to hit a $2 trillion market cap in the coming years, the company shows some major upside potential.
But despite the optimism, Microsoft continues to remain disruptive and cemented its growth through innovations in healthcare and the Xbox gaming system. Only time will tell if the tech giant can successfully meet growth targets, but I’d say the odds definitely lie in their favor.
As of this writing, Divya Premkumar did not own any of the aforementioned securities.
