Microsoft shares have been stable for 6 months. Why it might be time to get on board.
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Microsoft shares trade at a price-to-earnings-to-growth ratio of 1.4x, below the median ratio of 1.7x PEG in the large-cap software universe.
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Microsoft
stocks have died down. The software giant’s stock has been flat year-to-date, trading slightly below its level at the end of August 2020. If you sold the stock six months ago, you haven’t missed a thing.
But Microsoft (ticker: MSFT) continues to post exceptional financial results and the software giant should benefit through calendar 2021 and beyond from two key themes playing out in enterprise computing: the adoption of the cloud computing and a recovery in enterprise IT spending. Morgan Stanley analyst Keith Weiss thinks the stock’s relative underperformance provides an opportunity for investors and reiterated his overweight rating on Microsoft shares on Friday, raising his price target to $290 from $285. dollars.
In a research note, Weiss asserts that Microsoft’s exposure to public cloud (Azure), collaboration (Microsoft Teams), data (Microsoft Dynamics), machine learning, and security should support a 13% compound revenue growth through fiscal year June 2023.
“As the pace of digital transformation accelerates ahead, the age-old tailwinds behind the broader software segment are growing even stronger following the Covid crisis,” Weiss writes in a research note. “In this environment of improving demand, Microsoft is well positioned to accrue an even greater share of the IT portfolio, particularly as cloud adoption accelerates in large enterprises.”
Weiss is particularly excited about Microsoft’s potential to dominate the cloud market as more companies move away from more conventional IT infrastructures. “As large enterprises participate more fully in this move to the cloud, we expect Microsoft’s share gains to accelerate,” he wrote. He believes the company has advantages in both its long-standing relationship with corporate customers, which often spans decades, and in an extensive distribution network that includes both a large in-house sales team and thousands of partners.
The analyst notes that Microsoft shares are trading at a price-earnings-growth (PEG) ratio of 1.4x, lower than the median 1.7x PEG ratio in the large-cap software universe.
Weiss sees several factors that can drive the stock higher from here. He says current revenue will grow by about $70 billion over the next three years, driven by growth across the company’s product portfolio. It also forecasts an increase in gross margins of 300 basis points (100 basis points equals one percentage point) over the same period, resulting in compound annual growth of 19% in operating profit. And he thinks the stock can approach the company’s historic PEG ratio of 2 times.
On Friday, Microsoft shares rose 2.5% to $232.47.
Write to Eric J. Savitz at eric.savitz@barrons.com
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