This Microsoft stock forecast article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology – Senior Analyst at I Know First.

Summary:

• Microsoft’s stock was trading below $145 when I made my October 27 buy recommendation. The stock is now priced above $183.
• I am still endorsing MSFT as a buy. My new 12-month price target for this stock is $205.
• Microsoft continues to rule the $101 billion/year enterprise SaaS market.
• The SaaS market has still a lot of room to grow. The entire software industry is worth $450 billion/year.
• Lack of serious competition means Office 365 and desktop Microsoft Office will remain top-grossing software products.
• Bullish Microsoft stock forecast for long-term horizon.

The failure of Alphabet (GOOGL) to challenge Microsoft’s (MSFT) Azure and Office 365 is largely why MSFT is now trading well above $145.  Alphabet’s G Suite of productivity/collaboration apps are more affordable than Microsoft’s Office 365. However, home and business users still prioritize Office 365. Therefore, among many top stock picks around, you should definitely add more MSFT shares, because Office 365 has more than 200 million monthly active users.

Office 365 Is Why Microsoft Rules Enterprise SaaS

The runaway success of Office 365 against G Suite is why Microsoft is still number one in the $101 billion/year Enterprise Software-as-a-Service (SaaS) industry. Enterprise SaaS is growing at a CAGR of 39% and Microsoft’s share of that is more than 17%. I believe Alphabet’s share is less than 3%.

In spite of the cheaper business packages of G Suite, Office 365’s commercial (meaning enterprise subscribers) growth is still growing at 20%.  Based on the chart below, consumer or home users of Office 365 is now also more than 37 million. 

G Suite reportedly ended 2018 with 5 million paying subscribers. Alphabet has never disclosed G Suite numbers but I doubt if it now has more than 7 million paying customers. The huge disparity between Office 365 and G Suite’s number of paying customers is why you should favor MSFT over GOOGL.

Yes, MSFT now has higher valuation ratios than GOOGL. In essence, Microsoft is accepted as the better investment. Unlike Microsoft, Google also does not have a business social network platform like LinkedIn. There are now more than 575 million registered users at LinkedIn. Of that number, 260 million are monthly active users. Most of them are likely paying Microsoft Office or Office 365 customers. Most companies dependent on Skype for Business and Dynamics 365 are unlikely to subscribe to Alphabet’s G Suite.

Software Sales Is Bigger Than Digital Advertising

The higher valuation of MSFT is because Microsoft is king of the $450 billion/year software industry.  Global software sales is still bigger than digital advertising’s estimated annual revenue of $333 billion.  Using Office 365 is also not as vulnerable to privacy issues like it is with Alphabet/Google’s advertising practices.

Going forward, both companies are great investments. However, Microsoft is the safer long-term bet. My view is that SaaS annual growth rate will remain robust for the next 10 years. On the other hand, digital advertising’s growth will eventually slow down due to more people using ad-blocking on their PCs and mobile devices.

Moreover, MSFT’s Forward P/E of 32.34x is still lower than Adobe’s (ADBE) 49.08x. Adobe is a much smaller player than Microsoft when it comes to on-site software and SaaS. My fearless forecast therefore is that MSFT can rise to 34x forward P/E valuation before 2021 arrives. Looking at its EPS history, Microsoft has a good chance to end 2020 with annual EPS of $6.00. A 34x Forward P/E valuation multiplied by $6 EPS is $204. It is therefore reasonable to give MSFT a 12-month price target of $205.

Azure Is Another Tailwind

MSFT could truly hit $200 within the next 12 months if the $10 billion JEDI contract attracts more government/corporate customers to Azure.  Cloud computing infrastructure spending last year reached $96 billion. Microsoft now has 18% market share of that – second only to AWS’ share of 33%. Google Cloud still has less than 10%. Azure’s future growth potential is therefore another strong tailwind. Cloud computing infrastructure is expected to grow to a $384 billion/year business by 2025.

Study the chart below, Microsoft Azure also enjoys a higher annual growth rate than Google Cloud and AWS. It is inevitable that Azure will further increase its lead over Google Cloud.

I expect Azure to end 2021 with 20% share in cloud computing infrastructure. AWS will probably end up with 30% and Google 8%. Google Cloud also tried to bid for JEDI contract but no government head will entrust national security-level cloud computing infrastructure to the personal data gathering-expert Google.  

Trump’s dislike of Bezos aside, the U.S. government chose Azure over Amazon’s (AMZN) AWS because it obviously found it superior and/or more cost-effective. Trump got acquitted from his impeachment trial. He is likely to win a second-term. If this proves true, I expect Azure to win more cloud computing contracts from the U.S. government.

Final Thoughts – Microsoft Stock Forecast

The huge cash reserve of Microsoft also gives it a lot of leeway toward growing its lead in enterprise SaaS. As of December 31, 2019, Microsoft’s cash & equivalents is over $134 billion.  Microsoft can easily afford to buy a 51% controlling stake in other leading enterprise SaaS firms like Adobe or Salesforce (CRM).

If anti-trust regulators won’t allow Microsoft to buy other SaaS companies, a large portion of that $134 billion could be used on increased share buybacks and/or bigger dividend payouts. For the past fiscal years, Microsoft spent over $30.26 billion in share buybacks. Microsoft is planning to spend another $40 billion on buybacks. Buybacks and higher dividends ultimately lead to a higher stock price for Microsoft. This fact alone should lead to my 12-month price target of $205.

MSFT already has a 1-year price return of +74% but I Know First still has a bullish 12-month market trend forecast for it. This should convince you that MSFT has strong probability to breach $200 before 2020 ends.

Past Successful Microsoft Stock Forecast

I Know First has been bullish on MSFT stock forecast recently. On February 3, 2019, the I Know First algorithm issued bullish stock market predictions for MSFT for long-term horizons. As we see today, the algorithm successfully forecasted the movement of the MSFT price – so far Microsoft have risen by some 70% in line with the I Know First algorithmic trading forecast.

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Please note-for trading decisions use the most recent forecast.