Up 300% in 5 years, by how much can Microsoft’s stock increase?

Microsoft (NASDAQ: MSFT) was once seen as a mature tech stock owned for stability and income rather than growth. But over the past five years, Microsoft shares have risen about 300% as a visionary CEO shakes up his company.

Satya Nadella, who took over from Steve Ballmer in 2014, has reduced Microsoft’s reliance on Windows and Office license sales and expanded its ecosystem with a “mobile first, cloud first” mantra. Nadella ditched the company’s Windows Phone and smartphone ambitions, launched mobile versions of its apps on iOS and Android, and aggressively expanded its cloud services.

This transformation initially held back earnings growth, but it paid off as the commercial cloud business – which included Office 365, Dynamics 365, and Azure – became its new growth engine. Microsoft has also expanded its Surface and Xbox businesses to maintain a healthy presence in the PC and gaming markets, respectively.

These strengths have supported Microsoft’s results throughout the COVID-19 crisis, and its action has grown nearly 11% since the start of the year even as the S&P 500 slipped more than 12%. But in the longer term, will Microsoft continue to outperform the market?

Microsoft’s strengths

Windows accounts for nearly 80% of the desktop operating system market, according to StatCounter, while Office controls nearly 90% of the creative and email market, according to StatCounter. Gartner. Microsoft has leveraged its dominance in both markets to transform Windows and Office into cloud-based services. Microsoft initially offered Windows 10 as a free upgrade; adding a cloud-based app store and updates makes it more similar to iOS and Android.

Image source: Microsoft.

Microsoft then moved Office users from periodic upgrades to a subscription-based model with Office 365 and extended its Dynamics CRM (customer relationship management) platform as a cloud-based service. It also extended Skype to compete with Soft, and acquired LinkedIn to lead the professional social media niche market.

To support these services and the cloud storage and processing needs of enterprise customers, Microsoft has extended its Azure cloud infrastructure platform, which now ranks second in the market after Amazon Web Services (AWS).

Azure’s market share fell from 14.6% to 17.6% between the fourth quarters of 2018 and 2019, according to Canalys, while AWS’s share fell from 33.4% to 32.4%. Microsoft also won the Pentagon’s coveted $ 10 billion JEDI cloud deal, though Amazon is trying to delay the deal with legal action.

In the hardware market, Microsoft forced the laptop market to evolve with the Surface, which created a new niche of 2-in-1 devices. And he continues to challenge Sony in the game console market with the Xbox One and extended to the augmented reality space with HoloLens. It also wisely divested most of its display advertising business and partnered with Apple to present its productivity apps on iOS.

Microsoft’s main weaknesses

Microsoft’s cloud business revenue jumped 39% per year in its fiscal second quarter and accounted for more than a third of its revenue, but the company still faces fierce competition from AWS and other rivals in the cloud platform market, Selling power in the CRM cloud market and many small businesses including Slack and Zoom – in the cloud-based collaboration market.

Microsoft’s more personal IT segment, which generated 36% of its revenue in the last quarter from selling Windows licenses, hardware peripherals, Xbox consoles and its search-based ads, also remains more exposed to headwinds. macro as its cloud activity. Microsoft withdrew its guidance for the unit in late February, and it’s unclear whether growth in its cloud services can offset this slowdown.

Microsoft’s gaming revenue has also declined over the past year, as customers postponed hardware upgrades before the Xbox Series X launched in late 2020. However, Microsoft has sold fewer Xbox Ones than Sony has sold. PS4 over the past five years, and that gap could widen if Microsoft fumbles with the upcoming launch.

So how far can the stock skyrocket?

Wall Street expects Microsoft’s revenue and profits to grow 12% and 18% respectively in this fiscal year. The stock isn’t cheap at nearly 30 times forward earnings estimates, but Microsoft’s strengths – especially in the cloud market – arguably justify this premium valuation.

Microsoft already has a massive market cap of $ 1.33 trillion, so it may not be realistic to expect multibagger returns over the next five years. However, the stock can climb further, as its “mobile first, cloud first” strategy offsets the declining importance of its traditional businesses.