The relentless rally in the shares of Microsoft (NASDAQ:MSFT) isn’t showing any sign of peaking.
The company made history last week when it became the second U.S. public company after Apple (NASDAQ:AAPL) to reach a $2-trillion market cap. The Redmond, Washington-based company reached this milestone as its stock;s price continues to soar, hitting a record high once again yesterday, closing at $271.40.
Even after gains of this magnitude—which pushed shares 20% higher so far this year and 40% during 2020—analysts still see more upside. Microsoft, which outperformed both Apple and Amazon (NASDAQ:AMZN) this year, is flourishing under CEO Satya Nadella, who has reshaped the company into the largest seller of cloud-computing software.
What's attracting investors is the belief that MSFT has more long-term growth in store as it expands into areas like machine learning and cloud computing. Morgan Stanley analyst Keith Weiss, while reiterating a buy rating on Microsoft stock with a price target of $300, said in a recent note that the market is undervaluing the company.
“While the bears fear pressure on the multiple as EPS growth slows, we’d argue the current multiple doesn’t properly reflect forward EPS growth.”
More than 90% of Wall Street analysts recommend buying Microsoft, while none has the equivalent of a sell rating on the stock. The average price target points to an upside of about 11% from current levels.
Microsoft’s 400% Surge
Microsoft’s cloud-computing business has been the major factor behind the stock’s 426% advance in the past five years—a period in which Nadella also branched out into new growth areas. During his tenure, he spent more than $45 billion on acquiring companies, including business social network LinkedIn, video game developers Mojang and Zenimax, and the code-storage service GitHub.
These bets have largely paid off. Microsoft's Intelligent Cloud business accounted for 33.8% of the company’s 2020 revenue, making it the largest of the software and infrastructure giant's major business segments for the first time, and up from 31% in 2019. The division showed revenue growth of 24% last year, compared with the 13% growth in Productivity and Business Processes, and the 6% growth of Microsoft’s More Personal Computing unit.
And the pandemic has further accelerated MSFT growth. Millions of workers and students stuck at home during lockdowns used the company’s meeting software Teams to remain in touch and connected. As well, large corporate clients accelerated their shift to the cloud, while younger customers bought Xbox gaming subscriptions.
“Over a year into the pandemic, digital adoption curves aren’t slowing down. They’re accelerating,” Nadella said in a statement in April.
Bottom Line
As Microsoft's impressive rally continues, the stock hasn’t yet reached a point where it’s become expensive. The company is expanding its market share into new areas of the digital economy, like cloud computing and AI, while maintaining its leading position with legacy software products such as Windows and Office.
This durable advantage will help the company achieve sustained double-digit growth in revenue, earnings per share and free cash flow, making it a reliable tech stock to own over the long term.