Microsoft (NASDAQ:MSFT) stock is trading around an all-time high. But there are no signs the rally is ending anytime soon.
Microsoft shares, now around $112, have almost doubled from two years ago. But the bulls aren’t done. The stock now has 31buy ratings from analysts, up from 26 at the start of the year and the most since late 2010, according to Bloomberg. On average, these analysts predict Microsoft shares will continue to climb, hitting $121 in the next 12 months.
What’s behind this extremely bullish sentiment about Microsoft? The company has successfully transformed itself into a leader in cloud computing, where many analysts believe the future growth is.
Cloud Keeps Contributing More
Cloud computing is the delivery of computing services -- servers, storage, databases, networking, software, analytics and more -- over the internet. Cloud providers typically charge 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, the continually expanding market for public cloud computing will be worth $411 billion two years from now.
While Amazon (NASDAQ:AMZN) Web Services continues to be the leader in this segment, Microsoft is fast gaining the ground, rising to the second-largest player in the industry. The latest evidence that the company is firmly in control of its destiny came last month when Microsoft announced earnings for the period ended June 30.
Revenue from the company’s cloud-computing platform Azure rose 89% in the quarter, while sales of web-based Office 365 software to businesses surged 38%. With that impressive growth, sales from cloud segment now make up more than 30% of the company’s total quarterly revenue, boosted by winning some large clients such as Walmart (NYSE:WMT), which signed a five-year cloud deal in July involving Azure and Office 365.
Dividend Payouts Should Keep Climbing
Another reason that investors love Microsoft stock is the company’s solid track record of paying out higher dividends. Since announcing its first dividend in 2004, Microsoft has grown its quarterly payout by a whopping 425% to $0.42 per share.
After seeing continued earnings momentum, some analysts now predict more generous payouts. In a recent note to clients, Morgan Stanley Analyst Keith Weiss said he expects a larger-than-average increase in Microsoft's dividend, most likely in September, as the software maker benefits from the Trump administration's tax cuts and incentives to bring back cash from overseas.
According to Weiss, Microsoft stock has more upside helped by the “improvement in gross margins, continued (operating expenses) discipline and strong capital return.”
Buying stocks at record highs carries a lot of risks. But what makes Microsoft different from other momentum stocks is that the company has a diversified revenue stream.
It’s successfully integrating new lines of business, while its legacy business is still contributing significantly to its top line. Sales from personal computing were still 38% of revenue in the fiscal 2018, down slightly from a 44% contribution four years ago.
Given the company's continued leadership position in a variety of areas where there's still a lot of room for expansion, we don’t think the time is right to take profits or ignore this stock.