According to the latest estimates, the analyst community thinks Microsoft (NASDAQ:MSFT) shares are going to be worth $119.93 at some point in the foreseeable future. It’s only about 12% more than the current MSFT stock price, which isn’t a bad trade, but certainly not a must.
However, there are a handful of outlier price targets that should leave current and potential shareholders curious, if not downright optimistic.
Deutsche Bank and Piper Jaffray are just a few research firms expecting MSFT stock to hit $130, likely sooner rather than later. This target is more than 20% higher than the stock’s current value, even though it is higher than 28 times projected earnings per share next year.
Is such a goal simply too much, too soon (and subsequently out of reach)? Maybe. Given the company’s new leadership in the cloud computing market and its penchant for beating earnings expectations, high price targets may actually be perfect.
What analysts said
The incentive for a host of raised targets was the release of the software giant’s fourth fiscal quarter figures on Friday morning. Revenue of $30.09 billion was not only up 17% year over year, but exceeded estimates by $29.2 billion.
Earnings per share of $1.13 were better than $1.08 analysts were modeling. And it was the fifth consecutive quarter that Microsoft exceeded its earnings estimate (it has only fallen below once in the past four years).
“The cloud” was the breadwinner. Commercial cloud sales grew 53% year-over-year, driven by an 89% increase in Azure platform revenue.
By the way, depending on how you count market share, Microsoft’s cloud business is now bigger than Amazon.co.uk (NASDAQ:AMZN), IBM (NYSE:IBM) and Alphabet (NASDAQ:GOOGLNASDAQ:GOOG).
Even if you don’t count the market share in a way that indicates Microsoft’s cloud arm is the largest in the industry, the fact that the discussion is even happening says a lot.
That’s more than enough for Deutsche Bank analyst Karl Keirstead, who wrote in response to the company’s fourth-quarter report: “This magnitude of Microsoft-wide acceleration demonstrates a strong execution and strong traction in the cloud, as well as a very healthy overall IT spending backdrop. ”
Deutsche Bank added: “The 3QF18 drawdown was great, and this one was even better, highlighted by MSFT’s very confident tone of FY19 growth prospects and continued strong enterprise IT spending. .
Piper Jaffray’s Alex Zukin was largely talking about Microsoft’s commercial cloud arm when discussing its price hike target (from $123), “With the company’s sales organization running At full throttle and last year’s reorganization in rear view, we expect strong execution amid a strong demand environment to generate continued double-digit growth.
Even analysts who aren’t as well-known as Zukin and Keirstead with their price targets are still decidedly bullish (and even more so now) on MSFT.
Atlantic Equities analyst James Corwell also raised his target to $130, explaining:
“The fourth quarter of 2018 was a very strong quarter for Microsoft, with demand for the company’s cloud offerings and its on-premises products (server products, Windows) exceeding consensus expectations. The strength of the latter is particularly encouraging….
Bank of America/Merrill Lynch also claims that MSFT is expected to hit $130 for the foreseeable future.
Reality check for MSFT actions
Not all observers agree that Microsoft’s meteoric growth streak will last.
Jefferies analyst John DiFucci, who holds a price target of just $75 on MSFT shares – and is the only analyst to call it a “sell” – explained: “We continue to wonder if the outperformance unprecedented Windows vs. PC shipments is enduring, while questioning Azure’s ultimate margins.
He added, “…we believe AWS had a similar operating margin to Azure’s GROSS MARGIN while AWS was at the same scale as Azure currently. We’re just saying… there’s a risk.
His points are also well taken, even if they are exaggerated. The fact that he is the only one to have such doubts, however, is telling.
Conclusion on MSFT shares
While the handful of $130 price targets seem extreme on the surface, the reality is that Microsoft is an enterprise-oriented platform with no real peers.
The lines between office productivity, digital assistants, professional networking via LinkedIn, and business-focused cloud computing are blurring in ways that could not have been foreseen just a few years ago, and which could not have been combined in this way by any other organization.
It’s the long way of saying that if you’ve been impressed with Microsoft so far, it’s only scratched the surface. Businesses around the world are just beginning to realize the power of Microsoft’s one-stop-shop solution.
In other words, those $130 price targets aren’t crazy at all. MSFT stock has developed a strong habit of pushing well into the upper levels of its price targets, only to drive them higher before it even hits them.
As of this writing, James Brumley does not hold a position in any of the aforementioned titles. You can follow him on Twitterto @jbrumley.
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