MSFT Stock Forecast 2019
In today’s market, Microsoft Corporation (NASDAQ:MSFT) is not exactly the hottest ticker. But its performance in 2018 has still been very impressive, especially if you take into account the volatile market environment in recent months. As we get ready for the new year, investors are wondering what the MSFT stock forecast 2019 would look like. In my opinion, shares of Microsoft could reach $125.00 apiece, which would represent an upside of around 15%.
Allow me to explain…
MSFT Stock Analysis for 2018
Before we start with the 2019 forecast, let’s go over MSFT stock’s performance in 2018 so far.
Like many mega-cap tech stocks, Microsoft stock has exhibited a positive correlation to the overall market. That is, when the market goes up, MSFT stock tends to do well. And when the market tumbles, the stock will likely be in the red.
Still, it’s not a perfect correlation, because over time, Microsoft stock has greatly outperformed the benchmark indices. And that’s one of the reasons why many investors, myself included, love this Redmond, Washington-based tech giant.
Microsoft is a component of the S&P 500 Index, the Dow Jones Industrial Average (DJIA), and the Nasdaq Composite. And the good news is, despite being in the volatile tech sector, the company’s performance so far this year has been nothing short of impressive.
Year-to-date, Microsoft stock has returned 27%. To put this in perspective, the S&P 500 Index returned -1.7% during this period, the Dow is down 1.5%, while the Nasdaq climbed a measly 0.7%.
MSFT Stock Chart
Chart courtesy of StockCharts.com
What’s particularly worth noting is MSFT stock’s resilience in the recent market downturn.
You see, the U.S. stock market had a huge sell-off in October 2018. In particular, the Nasdaq plunged 9.2% for the month, marking its steepest monthly drop since November 2008.
Unsurprisingly, tech stocks have taken a serious hit. Looking at Microsoft’s mega-cap peers, we see that Amazon.com, Inc. (NASDAQ:AMZN) plunged 20.2% in the month of October, while Google parent Alphabet Inc (NASDAQ:GOOGL) tumbled 9.7%.
MSFT stock, on the other hand, slipped just 6.6% in October. In a time when tech stocks were dropping to the floor, Microsoft’s relatively better performance certainly gave shareholders peace of mind.
MSFT Stock Financials
One of the reasons behind MSFT stock’s gains so far into 2018 was its solid financials. Note that the company operates on a fiscal year that ends at the end of June. Therefore, its full-year fiscal 2018 results are already available.
In the 12-month period ended June 30, 2018, Microsoft generated $110.4 billion of revenue, representing a 14% increase year-over-year. Operating income grew 21% from the previous fiscal year to $35.1 billion. (Source: “Microsoft Cloud Drives Record Fourth Quarter Results,” Microsoft Corporation, July 19, 2018.)
Of course, in the eyes of Wall Street, the most important metric is still earnings per share. And on that front, Microsoft did not disappoint.
Excluding special items, the company’s adjusted earnings came in at $3.88 per share in fiscal 2018, representing an 18% increase from fiscal 2017.
Why MSFT Stock Could Reach $125.00 in 2019
Continued Growth in Financials
In this day and age, quarterly earnings are a major factor behind stock price movements in the U.S. Not everyone is a fan of the quarterly reporting schedule. Some say that if market participants have fewer financial statements to look at, they might be able to encourage companies to focus more on long-term goals.
Earlier this year, President Donald Trump said he asked the U.S. Securities and Exchange Commission (SEC) to study ending quarterly reporting and going to a six-month system for U.S. companies. (Source: “Trump’s pitch to end quarterly reports would follow EU, Australia,” Reuters, August 20, 2018.)
But until any change is made, stocks listed on the New York Stock Exchange (NYSE) and Nasdaq are still going to be scrutinized based on their quarterly results. And for Microsoft—a company that has beaten Wall Street’s earnings per share estimates in all four quarters in the past 12 months—the earnings seasons ahead could be catalysts.
In fact, if you take a look at Microsoft’s latest financial results, you’d see that the company is already firing on all cylinders in its fiscal 2019.
MSFT last reported earnings on October 24, 2018. In the first quarter of its fiscal 2019, which ended on September 30, 2018, Microsoft’s revenue grew another 19% year-over-year to $29.1 billion. The company also generated $10.0 billion in operating income, up 29% from the first quarter of its fiscal 2018. (Source: “Microsoft Cloud Strength Powers Record First Quarter Results,” Microsoft Corporation, October 24, 2018.)
Expectations were already high for this tech stock, but as I mentioned, Microsoft is pretty good at beating expectations. Wall Street projected that the company would deliver $0.96 in earnings per share for the September quarter. As it turned out, Microsoft earned $1.14 per share, which not only smashed analysts’ estimates, but also represented a 36% increase from a year ago.
If the company can continue to deliver faster financial growth than Wall Street expects in 2019, market participants might be willing to reward MSFT stock with a higher price tag.
Capitalizing on Cloud
If you haven’t been following Microsoft, you might be wondering how on earth a decades-old legacy tech company manages to deliver such impressive growth numbers.
Well, the answer has to do with a trendy word—cloud.
Cloud computing is one of the hottest sectors in tech right now, and Microsoft has carved out a solid share in that market.
According to a report by market research firm Gartner Inc (NYSE:IT) earlier this year, Microsoft was the second-biggest player in the worldwide infrastructure as a service (IaaS) market in 2017. And while Amazon ranked No. 1 in terms of market share, Gartner found that Microsoft was growing the business at a much faster pace. (Source: “Gartner Says Worldwide IaaS Public Cloud Services Market Grew 29.5 Percent in 2017,” Gartner Inc, August 1, 2018.)
The Gartner report is based on 2017 results. The good news is, Microsoft’s growth momentum in the cloud computing industry has continued to its fiscal 2019.
Microsoft has three main segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. In the first fiscal quarter of 2019, Intelligent Cloud was by far the company’s fastest-growing segment, with revenue surging 24% year-over-year to $8.6 billion.
In particular, “Microsoft Azure”—which provides software as a service (SaaS), platform as a service (PaaS), and IaaS—delivered a whopping 76% revenue growth.
The reality is, more and more companies are moving their infrastructure and computing to the cloud. As one of the biggest players in the business, Microsoft stands to cash in on this trend. And that’s another reason behind my bullish MSFT stock forecast for 2019.
Returning Cash to Investors
This is an often-overlooked factor when it comes to tech stock investing. Many investors like tech stocks for their growth potential. That is, if a company can churn out decent growth rates, investors will warm up to it.
But at the end of the day, if a company is established enough, it would be nice if it can return some cash to investors. Think about it, some of the hot tech companies are raking in billions of dollars every year, and shareholders definitely deserve a piece of the action.
Microsoft stock has a market cap of over $833.0 billion, so it is certainly established enough. And like many other mega-cap tech stocks, Microsoft has been returning cash to investors by buying back its shares.
In the company’s fiscal year 2018, Microsoft spent $8.6 billion on share repurchases. In the first quarter of its fiscal 2019, the company bought back another $2.6 billion of its stock.
Going forward, Microsoft will likely continue pursuing its share purchase program. Buying back its shares on the open market would lead to increased demand, which could in turn put upward pressure on the MSFT stock price.
Furthermore, Microsoft stands out among its peers because the company also has a regular dividend policy in place. This is because, while a share repurchase program helps increase existing shareholders’ ownership in the company over time, it doesn’t allow investors to get paid directly. With dividends, investors can collect cold, hard cash with certainty.
The best part is, Microsoft’s dividends have only been going up. Since the company started paying regular dividends in 2004, management has raised the payout every single year, by a total of 475%. (Source: “Dividends and Stock History,” Microsoft Corporation, last accessed December 11, 2018.)
Also, paying a consistently increasing dividend is a genuine sign of strength for a company. This is because no one likes dividend cuts. So if Microsoft raises its payout, it means management is confident about generating enough profits to meet the dividend obligation down the road.
To put this in perspective, neither Amazon nor Google has a dividend policy in place.
Of course, because dividends are sticky, investors already expect Microsoft to keep paying them. What could cause MSFT stock to pop in 2019 is another dividend increase.
The company’s latest dividend hike was announced in September. It was a 9.5% increase to its quarterly dividend rate to $0.46 per share. If Microsoft’s Board of Directors declares another sizable dividend increase in September 2019, it would give investors a good reason to own MSFT stock.
Given the company’s top and bottom line growth, the potential of its cloud segment, ongoing share repurchases, and an upcoming dividend increase, I believe that a 15% upside in MSFT stock (translating to a $125.00 price target) could be in the works for 2019.
Also, using data from Yahoo! Finance, we see that the company is expected to earn $4.44 per share in profits in its fiscal 2019. If Microsoft meets that earnings-per-share expectation, my price target of $125.00 would lead to a price-to-earnings multiple of around 28-times, which is not a high number in the software industry. (Source: “Microsoft Corporation (MSFT),” Yahoo! Finance, last accessed December 12, 2018.)
Of course, as it stands, uncertainty remains a major theme for the U.S. equity market. If there’s another sell-off happening in 2019, chances are MSFT stock will take a hit as well. But if the question is whether investors should consider Microsoft stock for the long term, I believe the answer is a resounding yes.