MSFT Stock Prediction: Clouding Services Will Determine Microsoft’s Future

This article was written by Gabriel Rodan, a Financial Analyst at I Know First.

Summary

  • Growth driven by Cloud Services at 27% and Azure at 73%.
  • Strong balance sheet, fundamentals and future growth prospects justify rich valuation of 28 times earnings
  • Consolidating near important technical levels within range of $123 and $131 after yearlong rally with possibility of continuation to upside

The Bottom Line and Azure

In the last year, Microsoft stock has outperformed and many analysts maintain high expectations. A recent quarterly filing has revealed that Microsoft’s core business keeps growing but future volatility and growth will be dictated by cloud services sector. Microsoft is a leader in its industry and I expect long term sustainable growth in its core business segments. Notably, Office Commercial revenue increased 12%,Server Products and Cloud Services revenue including LinkedIn increased 27%, Dynamics revenue increased 13%, Windows Commercial revenue increased 18%, Microsoft Surface revenue increased 21%, and search advertising revenue related to Bing increased 12% in the third quarter of the 2019 fiscal year. However, I expect that Azure and the company’s growing intelligent cloud computing segment will be the fuel that dictates the company’s growth. In the fourth quarter alone, Server products and cloud services revenue increased 27%, driven by Azure growth of 73%. This has been an important source of expansion for the company and this segment grew over 82% from 2017 to 2018 where its revenue grew from $7.4 billion to $13.5 billion. This is part of the trend of shifting growth from hardware to software and related services. This growth could be overpriced into the stock and there could be a pullback in the near to medium term as there is a reversion to the mean in terms of growth and shareholder expectation but this would be a good buying opportunity for the future. Azure’s growth went from 98% a year ago to 73% in the most recent quarter. MSFT is currently only down slightly less than 6% from its highs. I suspect that any negative moves in the stock will be for this reason and therefore are healthy liquidation breaks especially given the stock’s tremendous performance in the last year.

Competition and Price Targets

The company is currently trading at a PE ratio of 28 and a PEG ratio of 2.20 which is a rich valuation but can be justified by a combination of their growth and status as a large and stable tech company with a consistent track record. It is projected to have EPS of 4.58, 5.09, and 5.78 for fiscal years 2019, 2020 and 2021 respectively. At current market prices, these represent a PE of 27.5, 24.26, and 21.36 which are notably high. Microsoft is invested in the future and despite having aggressive growth, it is well established and has billions of dollars on its books. Management is clearly committed to returning value to shareholders through dividends and more notably, stock buybacks that will continue to bolster the stock price. Microsoft is a diverse company in terms of services and products offered, therefore it has fierce competition in various sectors. Some of its biggest competitors are SAP, Google, Apple, Facebook, Adobe, and Amazon whose EV/EBITDA ratios are 21.75, 15.55, 10.11, 16.5, 40.64, and 28.16 respectively. Microsoft currently trades at an EV/EBITDA of 16.95 but given its high growth and high margins in several segments that include cloud computing and LinkedIn, 20 can be realistic for Microsoft’s EV/EBITDA within the next year. This implies a market cap (Equity Value) of $1082.2 billion and a share price of $141.22 per share within the next year assuming $86.34 Billion in debt and $131.54 billion in cash and cash equivalents.

MSFT Stock Prediction

Market Risks

Microsoft is a diverse multinational conglomerate and as such, faces a variety of risks to its business and valuation. The first risk is a general downturn in global markets in light of macroeconomic instability resulting from new American trade policy. Another macroeconomic risk factor is that Microsoft has significant revenues abroad and a strengthening US dollar could adversely affect its EPS as the company has exposure to foreign currencies. Although operating income increased 11% last year, there was an unfavorable foreign currency impact of 3% highlighting the relative significance of this risk factor. In terms of risks to the underlying business, the technology segments Microsoft is involved in are hyper competitive and the company faces competition on many fronts which is why it has increased operating expenses to remain competitive. The competitive nature of its business environment has directly lead to increases in research and development, sales and marketing expenses. In some cases, the failure of these projects pose as a risk to future earnings. Microsoft has also recently been silent on the Huawei ban and is likely waiting to see if the trade ban is alleviated under a trade agreement with China before June 25 before pulling all contracts with them. They have already pulled Huawei computers from their website but remain silent on other collaboration. This would be a small inconvenience financially for Microsoft compared to the devastating blow it would be to Huawei whose computers would be useless without a windows operating system.

Technical Outlook

It is important to contextualize the company’s fundamental performance with the stock’s performance. Microsoft is currently trading at $125.83 per share at an important inflection point. It has been trading strongly since the new year in a defined upward channel and is currently up 21.64% year to date but down almost 6% from its highs of about $131 per share following a positive earnings release. Since these earnings were released, the stock has been consolidating within a defined range between $123and $131 per share. It is currently trading below a trendline following a series of lows since the new year which could be a bearish signal but I would wait until it breaks and trades below $123 with significant volume to take a short position. Another way to trade this is to buy now near the previous low of $123 predicting that the stock will trade back into higher levels of the range where it has consolidated. The stop loss would be below $123 if it trades there with significant volume and follows through to the downside.

I Know First Bullish MSFT Stock Prediction

MSFT Stock Prediction

This is the I Know First MSFT stock prediction for the next year. It currently has a positive outlook with a signal strength of 73.63 and predictability indicator of 0.56.

Past I Know First Success with Microsoft Stock Prediction

On February 3, 2019 I Know First made bullish MSFT stock prediction for the next year and MSFT has risen over 25.41% since then.

MSFT Stock Prediction
MSFT Stock Prediction

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Please note – for trading decisions use the most recent forecast