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Microsoft
Microsoft Corporation (NASDAQ: MSFT) is the largest software company in the world. They have successfully transitioned to a cloud-based service model in recent years. The main revenue drivers are server products and cloud services, which include Azure, and office products and cloud services, which include Office 365 and Microsoft Teams. The company also derives significant revenue from Windows, games, LinkedIn and other areas. Below I will discuss current and future growth drivers and the path to a price of $400 per share.
MSFT stock price
Microsoft has been on an absolute tear for several years now. Even the March 2020 COVID-19 stock market crash is just a small error on the three-year chart. The stock is currently trading near $335 per share, near all-time highs.
As shown below, share price gains outpaced impressive gains in revenue, EBITDA and earnings per share.
Microsoft stock rating
At the same time, margins are the highest in two decades thanks to almost widespread growth. As shown below, some of the highest growth is in the highly profitable server products and cloud services segment. This segment includes Microsoft Azure.
Graph created by author, data from MSFT 10-K.
Even better, as shown below, for the three months ended September 30, 2021, growth in this area appears to be accelerating. Revenue from server products and cloud services increased 35% from the third quarter of FY21. It increased 27% in FY2021 compared to FY2020.
Chart created by author, data from MSFT 10-Q.
Total revenue also accelerated, from 18% growth in fiscal 2021 versus fiscal 2020 to 22% in the first quarter of fiscal 2022 versus the same period of fiscal year 2021. That’s incredibly positive for long-term investors. As mentioned earlier, Microsoft has been stellar on the margins. Already strong margins exceeded most expectations.
Comparing with other big tech companies, we can see how impressive those margins have been.
Microsoft also has a fortress balance sheet with $111 billion in short-term investments and total net debt of $52 billion as of last report.
Can MSFT stock reach $400?
Microsoft also made aggressive stock buybacks. This has multiple advantages. First, it supports the stock price in the open market because there is a base level of demand. Then, by reducing the number of shares, the EPS of the company increases and the share price should follow. The most recent buyback program calls for up to $60 billion in buybacks, or about 2.5% of market capitalization. As shown below, the number of shares has declined steadily and has declined by more than 2% over the past three years. At the same time, redemptions have steadily increased.
Mentioned above, cloud services accelerated their growth in the first quarter of fiscal 2022. These services directly compete with Amazon Web Services (AWS) (AMZN) and Google Cloud (GOOG). All of these are developing rapidly as they compete for position. Note that Microsoft reports that Azure alone grew by 50% in the third quarter of fiscal 2022 compared to the previous year. The chart below compares the three platforms side-by-side and uses Microsoft revenue for all server products and cloud services.
Chart created by the author with data from the company’s SEC filings.
Amazon remains the leader, however, Microsoft is gaining market share. According to Statista, Microsoft now serves more than 20% of the total market.
Overall Server Products and Cloud Services revenue increased 35% and 33% in constant currency. Azure and other cloud services grew 50% and 48% at constant currencies, ahead of expectations, thanks to our consumption-based services. -Amy Hood, Chief Financial Officer on the third quarter earnings call.
Microsoft also sees huge opportunities in the Metaverse, which I’ve discussed in detail here. Microsoft Mesh for Teams will enable a digital environment for users to interact virtually. The potential total addressable market for the Metaverse will number in the hundreds of billions in the coming years, according to Bloomberg.
Is the MSFT stock a buy, sell or hold?
At the current forward PE and given EPS estimates for fiscal 2022 and 2023, I predict that Microsoft can hit the $400 per share mark within 18 months – barring any macroeconomic event. A loss in earnings could also delay the rise to $400 per share, however, given recent history, it is much more likely that current estimates are too low rather than too high. In the meantime, investors can relax and collect their dividends.
Microsoft is currently trading at a forward PE close to 36 and an EV/EBITDA close to 25. stock from $327 to $411. Using EBITDA estimates would indicate an enterprise value close to $2.8 trillion or 16% above current enterprise value.
Wall Street analysts are very bullish on Microsoft according to Wall Street ratings from Seeking Alpha. 39 analysts are bullish or very bullish, while two are neutral. There are no bearish notes. The short term mid price target is $364.81 with the high target being $410. The low target is $300.
Microsoft has a rich history, and this current period can be considered one of its best performances. I remain bullish on Microsoft for long-term investors.
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