This Could Be Big for MSFT Stock
Microsoft Corporation (NASDAQ:MSFT) shares jumped almost six percent last week after investors cheered the company’s latest earnings report. MSFT stock has enjoyed quite the bull run as of late. It is now up 31.5% over the past 52 weeks, compared to a drop of approximately five percent for the S&P 500.
After such a run, especially in a weak market, can MSFT stock move higher in 2016?
I usually steer clear of stocks that are the darlings of analysts. Of the 35 analysts covering MSFT stock, 22 have recommended Microsoft as a “Strong Buy” or “Buy.” Only two analysts think MSFT stock is a sell at its current price. This leaves me thinking that any future bad news coming out of Microsoft will send the stock tanking. But after the latest earnings report, I believe that MSFT’s stock can run higher in 2016.
Let me explain.
Microsoft easily beat analyst targets last Friday for its fiscal second quarter. Earnings came in at $0.78 a share on revenue of $25.69 billion, compared to analyst expectations of $0.71 a share on revenue of $25.26 billion.
Those numbers translate to 11% growth in earnings per share (EPS) and a dip of 1.7% in revenue. If we exclude the rising dollar’s impact on foreign exchange, Microsoft’s EPS would have grown 23%, while revenue would have grown three percent. (Source: “Microsoft Nears High On Cloud-Fueled Q2 EPS, Sales Beat,” Investors.com, February 2, 2016.)
Analysts are clearly rewarding the stock on growth at the margins and its ever reliable “Windows” and “Microsoft Office” business lines. Without significant revenue growth, there is only so much cost-cutting that can done to drive earnings growth. So where is this growth going to come from?
Certainly not from the “Windows Phone,” which is all but dead. In the most recent quarter, Microsoft only sold 4.5 million “Nokia Lumia” phones, dropping 57% from a year ago. (Source: “Windows Phone is Dead: What’s Next for Nadella’s Microsoft?” Yahoo! Finance, February 2, 2016.)
And International Data Corporation (IDC) reports that in the latest quarter Microsoft and Nokia only managed to sell 110 million Windows phones. This pales in comparison to the 4.5 billion “iOS” and “Android” phones sold in the same timeframe. (Source: Ibid.)
So what will drive Microsoft’s future sales growth? Look to the cloud.
Since Satya Nadella took over as Microsoft’s CEO nearly two years ago, he has transitioned the company from only allowing users to access Microsoft services with a Windows phone to making its cloud-based services accessible on any device, including Apple Inc.’s (NASDAQ:AAPL) “iPhone” or phones powered by Alphabet Inc’s (NASDAQ:GOOG) Android operating system (OS).
The strategy is paying off and it will continue to do so for MSFT stock. In the most recent quarter, Microsoft’s cloud services experienced explosive growth. Its “Azure” cloud service revenue grew by 140%, while Office 365 grew by 70%.
Altogether, Microsoft’s cloud-based services (Office 365, Azure, “CRM Online,” and others) reached an annualized rate of $9.4 billon. This puts Microsoft slightly ahead of Amazon.com, Inc.’s (NASDAQ:AMZN) “Amazon Web Services,” which saw revenue grow to $7.9 billion in 2015. (Source: “Annual revenue of Amazon Web Services from 2013 to 2015 In million U.S. dollars,” Statista, last accessed February 2, 2016.)
Microsoft management expects that number to reach $20.0 billion by 2018. (Source: “Microsoft Corporation Surges as Demand for Cloud Services Continues to Rise,” The Motley Fool, January 28, 2016.)
The Bottom Line on MSFT Stock
Several analysts have bumped up their price target for MSFT stock to the $60.00 to $66.00 range. (Source: “Microsoft Jumps 6%: Street Loves Azure, Cost Chopping,” Barron’s, January 29, 2016.)
MSFT stock was left for dead about two years ago, but CEO Satya Nadella has positioned the company to have a great 2016 and beyond, as Microsoft continues to transition to cloud-based services.