Microsoft (NASDAQ: MSFT) was on a tear in 2019, with stocks up about 55%. The software giant has a market cap of $ 1.2 trillion at the time of writing and is just below Apple as the largest publicly traded company.
Investors couldn’t be blamed if they fear stocks will be priced in perfection and any misstep could cause stocks to plummet in 2020.
But investors don’t have to worry. There are plenty of reasons why 2020 could be another big year for Microsoft stock.
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Cloud computing will be a huge driver in 2020
One of the main drivers of Microsoft’s momentum has been its cloud computing business. For the quarter ended September 30, 2019, its commercial cloud business generated $ 11.6 billion in revenue, marking a 36% year-over-year increase. Azure led the unit, with revenue growth of 59%. Microsoft competes with Amazon Web Services and, although much smaller, is gaining in speed. Azure saw 59% revenue growth in the third quarter, compared to 35% growth for Amazon’s cloud business.
According to market research firm Canalys, Amazon is the clear leader in cloud computing, controlling 33% of the market against 17% for Microsoft.
The gap between the two is expected to narrow in the coming years, as Microsoft gets more and more customers to its credit. Some even believe that it will one day become the cloud leader. Microsoft just won a multi-year, $ 10 billion Pentagon contract, beating the frontrunner Amazon. Amazon has filed a lawsuit contesting the contract award, citing political bias on the part of the Trump administration. Government is a big customer for Amazon and Microsoft as they look to grow their cloud businesses as agencies spend billions of dollars to migrate to the cloud and are more inclined to work with technology vendors who already have relationships. with the federal government.
Microsoft’s opportunity in the cloud market is one of the reasons Bank of America analysts just set a 2020 share price target of $ 200, which means they believe Microsoft may gain an additional 26% in 2020. Analysts predict Azure will account for more than 40% of Microsoft’s growth in the coming years. Bank of America believes Microsoft can easily increase revenue by 10% per year in the years to come from its cloud business.
He is not alone in his assessment. Stifel Nicolaus models Azure for $ 26.7 billion in revenue in fiscal 2021, growing to over $ 90 billion by 2030. Revenues from its Intelligent Cloud unit, which includes Azure, amounted to $ 10.8 billion in the first quarter of fiscal 2020. Stifel Nicolaus predicts that Microsoft’s cloud revenues will exceed those of Microsoft Windows, Microsoft Office and Windows Server combined in just three years. The firm believes that other huge Pentagon-type contracts are in the cards for Microsoft.
Products just in time for the 2020 holidays
Outside of cloud computing, Microsoft has a games business that could boost revenue. Just in time for the 2020 holiday season, Microsoft plans to launch its new Xbox Series X gaming console. It is banking on the new gaming system to boost sales, slowed by the “end of life” of the current generation of consoles. games. It also offers new foldable Surface devices that hit the market ahead of the holiday sales season. If they resonate with consumers, it could increase sales and Microsoft’s stock price.
Another reason investors might flock to the stock in 2020 is the stability brought by its subscription business. Many corporate customers pay monthly fees to access Microsoft’s software and cloud services. This gives Microsoft recurring revenue and gives investors predictability. If the trade war between the United States and China persists until 2020, investors will seek that stability. The same goes for a recession. Microsoft isn’t immune to a recession, but it does have a huge list of large business customers who won’t be as affected by a downturn as consumers. Businesses can even invest in the cloud during a recession to reduce spending.
It’s unclear exactly how 2020 will play out, but with Microsoft only scratching the surface in the cloud market and new products coming out ahead of the holiday shopping season of 2020, investors have reason to be optimistic. .
This article represents the opinion of the author, who may disagree with the “official†recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
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