There's a lot of excitement about Microsoft (NASDAQ:MSFT) right now. Analysts at Morgan Stanley) see this legacy technology giant becoming the first $1 trillion-dollar firm in the U.S. in the next 12 months. While raising their one-year price target by 50% to $130 a share, these analysts are also quite bullish on Microsoft’s future prospects.
Touching a trillion dollars in market cap will be a huge and of course very positive reversal in the fortunes of the Redmond, Washington-based company which mostly underperformed during the past decade. It missed the action by focusing too much on its Windows operating system and the other traditional software it develops, most of which had a bleak future.
However, judging by the growth momentum on which it’s currently riding now, it seems Microsoft has found its second wind. It's in the middle of another long-term boom that may take its share price back to the peak it reached just before the 2000 tech bubble burst.
What investors are loving about Microsoft is that the company’s turnaround strategy has begun to pay off. At the same time, its CEO, Satya Nadella, firmly remains in charge of the company’s destiny. He's delivered $20 billion in sales—way ahead of schedule—from its flagship cloud division; commercial sales jumped 56% in the first-quarter of 2018, followed by a 14% gain in the company’s Intelligent Cloud business year-over-year.
In a note to clients this week, Morgan Stanley's Keith Weiss wrote:
"Strong positioning for ramping public cloud adoption, large distribution channels and installed customer base, and improving margins support a path to $50 billion in EBIT and a $1 trillion market cap for MSFT."
Cloud computing, to put it simply, is the delivery of computing services—servers, storage, databases, networking, software, analytics and more—over the Internet which in this particular business is dubbed the “cloud.” Companies offering these services are called cloud providers and typically charge sometimes significant fees for cloud computing services based on usage, similar to the way homeowners are billed for gas or electricity consumption.
The stakes in the fast growing cloud business are too high for tech behemoths not to be involved. According to an estimate by Gartner Inc., the continually expanding market for public cloud computing will be worth $411 billion two years from now. Competition is fierce in this niche of the market. Microsoft is emerging as a winner, currently ranked number 2, with Amazon (NASDAQ:AMZN) in the lead position.
Microsoft's acquisition of LinkedIn, a business oriented social networking site with more than 530 million professionals, which MSFT purchased for $26 billion in 2016 in one of the biggest technology acquisitions in history, has also started to pay off. In the second quarter of 2017, LinkedIn contributed $1.3 billion to Microsoft’s $28.92 billion total revenue. That's the highest total revenue for Microsoft since the acquisition closed in December 2016.
LinkedIn's contribution to Microsoft's bottom line comes via three business divisions. The biggest, called "talent solutions," helps recruiters attract and find employees. The site also makes money from advertising and offers paid subscriptions for online courses and premium access on its network.
These gains, along with strong growth in Office 365 subscriptions, have led investors to push Microsoft’s share price higher by 37% over the past 12 months, outpacing gains for that period at rivals Google (NASDAQ:GOOGL) and Apple (NASDAQ:AAPL).
The Bottom Line
If you're a long-term investor Microsoft stock has unique appeal. It’s a perfect retirement stock that also offers huge growth potential. Microsoft began paying quarterly dividends in 2004 and has raised its payout every year since then, from its initial quarterly dividend rate of $0.08 per share to today’s $0.42 per share.
Microsoft has a solid track record of returning capital to investors in the form of dividends and share buybacks and CEO Nadella has also positioned the company for long-term growth. If you’re looking for a technology name to buy and hold, then Microsoft is the company you can count on, especially when the company is doing so many things right.
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