The last year has been rewarding for Microsoft (NASDAQ:MSFT) investors with the cloud business providing growth acceleration. The year 2020 is likely to be no different for Microsoft stock with analyst estimates indicating double-digit earnings growth.
As a matter of fact, analyst estimates suggest an average annual earnings growth of 11.90% over the next five years.
From a technical perspective, MSFT stock traded in the range of $135 to $140 for nearly four months. As the stock trends higher, the above levels will serve as a strong support zone. Further, a price-to-earnings ratio of 29.7 is not expensive compared to an industry average P/E of 40.1. Therefore, the valuation does indicate that MSFT stock price will continue to trend higher.
The Positive Impact of JEDI Contract
The Pentagon’s Joint Enterprise Defense Initiative (JEDI) contract was awarded to Microsoft with a total worth of $10 billion.
More than just the revenue and earnings impact, the JEDI contract is important for the following reason – The contract acts as a certificate for Microsoft that it offers higher security for classified initiatives.
The global cloud infrastructure service market is expected to grow from $73 billion in 2018 to $166.60 billion by 2024. Microsoft is well-positioned to make further inroads considering this growth potential.
Considering the broader picture, it’s not surprising that Amazon (NASDAQ:AMZN) has filed a complaint in the U.S. Court of Federal Claims. Amazon claims that the deal was influenced by Donald Trump since Jeffrey Bezos is his “political enemy.”
However, according to Wedbush securities analyst Daniel Ives, the protest is unlikely to “change the decision.” Microsoft will therefore retain the advantage, which can translate into order intake acceleration.
Acquisitions and Microsoft Stock
As of September 2019, Microsoft reported cash and equivalents of $136 billion. In addition, the company reported operating cash flow of $13.8 billion for the first quarter of 2020. This implies an annualized OCF of $55 billion.
Microsoft, therefore, has ample financial headroom to pursue inorganic growth. For the financial year 2019, Microsoft acquired 20 companies. The focus has been on Internet of Things and artificial intelligence.
Furthermore, some acquisitions target growth and expansion of Azure services. As an example, the acquisition of jClarity will “help optimize Java workloads on Azure.”
Specific to AI acquisitions, Apple (NASDAQ:AAPL) has made 20 acquisitions between 2010 and 2019. Alphabet (NASDAQ:GOOG) holds the second spot with 14 acquisitions and Microsoft is not far behind with 10 acquisitions.
Besides acquisitions, partnerships will also help Microsoft keep pace with innovations. Microsoft and OpenAI have partnered in 2019 to build new Azure AI supercomputing technologies. With aggressive acquisitions and collaborations, Microsoft will continue to grow and innovate.
Betting on China and India
As trade tensions ease, I am bullish on Microsoft, among other names in the technology industry like Micron Technologies (NASDAQ:MU). China is the second-largest economy in the world and Microsoft believes that there are increasing business opportunities in the country. It is also likely that GitHub will expand in China and this should help in top-line growth from the country.
Talking about top-line growth, Microsoft India has reported more than $1 billion in revenue. Cloud business and Office 365 have triggered growth in India. It is likely that double digit growth will sustain in India and potentially accelerate with increasing cloud adoption.
Therefore, I am bullish on Microsoft’s growth potential from China and India in the coming decade.
My Final Views on Microsoft Stock
For the latest quarter, Microsoft paid $8.4 billion to shareholders in the form of dividends and share repurchase. With robust cash flows, shareholder value creation is likely to sustain.
In addition, cloud business driven top-line and earnings growth will ensure that Microsoft stock trends higher in 2020 and beyond. Easing trade tensions can help in accelerating global GDP growth and that serves as another growth catalyst.
Overall, Microsoft stock is worth holding for the long-term. Steady growth and free cash flows will take the stock higher.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
