How Microsoft could become a $1 trillion company

FAN Editor

Microsoft will soon be worth $1 trillion, according to a growing chorus of analysts.

The company’s latest earnings results, which showed continuing strong growth in its cloud business, has convinced some that the company is succeeding in moving its historic business model of selling licensed software to a subscription-based cloud model that could deliver more steady revenue and growth over time.

Microsoft might not be the first company to the trillion-dollar mark — Apple on Friday afternoon had a $943.7 billion market cap, more than $100 billion ahead of Microsoft’s $821.4 billion market cap, and Amazon and Alphabet are both ahead of Microsoft as well. But the company’s valuation has grown considerably in the past four and a half years under Satya Nadella.

Following the release of the company’s fiscal fourth-quarter earnings and guidance for the quarters ahead, some analysts raised their price targets on Microsoft stock, reaching as high as $130. To eclipse the trillion-dollar mark, Microsoft would have to reach $130.16.

Piper Jaffray analysts led by Alex Zukin raised their price target from $123 to $130 in a Friday note.

“With the company’s sales organization firing on all cylinders and last year’s re-org in rear view, we expect solid execution amid a strong demand environment to drive ongoing double digit growth,” they wrote.

The Piper Jaffray analysts noted that the growth-oriented Commercial Cloud group — including the Azure cloud, commercial subscriptions to Office 365 productivity applications and Dynamics 365 cloud-based business software — delivered 25 percent of Microsoft’s total revenue, up 3 percent sequentially.

Deutsche Bank’s Karl Keirstead and Taylor McGinnis in a Friday note raised their target price from $120 to $130.

“The 3QF18 print was terrific, and this one was even better, highlighted by MSFT’s very confident tone about the FY19 growth outlook and continued strong corporate IT spend,” they wrote.

Atlantic Equities analyst James Corwell raised his price target for the end of 2019 from $125 to $130 in his note on Friday.

“Q418 was a very strong quarter for Microsoft with demand for both the company’s cloud offerings and its on-premises products (server products, Windows) exceeding consensus expectations,” Corwell wrote. “Strength in the latter is particularly encouraging given the historical debate on the stock as to the extent to which the cloud will be additive or cannibalistic of Microsoft’s legacy business. These results would appear to suggest that the transition is firmly additive, not just by expanding Microsoft’s addressable market but also by increasing demand for its on-premises products.”

Multiple analysts acknowledged in their notes that chief financial officer Amy Hood had said on Thursday’s earnings call that Microsoft more than doubled the number of Azure agreements worth more than $10 million. At the same time, some noticed that Microsoft appears to be succeeding in making Azure more profitable.

“For the seventh quarter in a row, Amy Hood noted that Azure gross margins improved materially,” the Piper Jaffray analysts said. “We would expect this to continue through FY19 driven by scale, premium revenue mix and internal infrastructure innovations and process improvements.”

But Jeffries analysts led by John DiFucci wondered about where Azure’s margins will end up in the long term, especially in relation to competing cloud Amazon Web Services, in their Friday note.

“We don’t believe that Azure reaching scale and profitability in the same trajectory and fashion as AWS should be a foregone conclusion,” the Jeffries analysts wrote. “Given the competitive market and need to invest in both capex and operating expenses, profitability along AWS’s level may prove elusive for Azure for several years, if not forever. For example, we believe that AWS reported a similar operating margin compared to Azure’s GROSS MARGIN when AWS was the same scale as Azure is currently. We’re just saying … there’s risk.”

The analysts’ updates this week come more than seven months after Evercore ISI analysts made the case for how Microsoft could reach the trillion-dollar valuation by 2020 or sooner — but at that time, their price target was $106.

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