Microsoft stock has outperformed many peers in Big Tech over the past year.
Jeenah Moon/Getty Images
The beginning of the year hasn’t been kind to Microsoft , but the outlook for the stock is strong for at least one key reason: continuing growth in cloud software.
While shares in Microsoft (ticker: MSFT) have fallen some 5% since the beginning of 2022—amid wider pressure on the technology sector—that belies a remarkable performance over the past year. The stock has climbed almost 50% since early January 2021, outpacing gains among peers in Big Tech including Apple (AAPL), Amazon (AMZN), and Meta Platforms
(FB).
But it has ended the second week of 2022 with a share price of just $318. This is well below the $372 average target price calculated from dozens of analyst estimates recorded in FactSet data and implies a 17% upside.
Microsoft is one of the favorite tech stocks of 2022 for Dan Ives, an analyst at broker and investment bank Wedbush who is bullish on the wider sector. Wedbush has a target price on Microsoft of $375 with a rating of Outperform.
Over the next year, Ives sees Microsoft stock heading for the elusive $3 trillion market cap milestone – a level of market value seen only by one other public company: Apple, which touched it early this year.
For that, investors can thank cloud software. The Covid-19 pandemic has accelerated a massive digital transformation across companies, boosting sales of cloud software and services, which are programs run on remote servers instead of costly in-house machines. Microsoft—and its Azure cloud computing service—has been a major beneficiary. That should continue.
Ives said that December quarterly checks for Microsoft show incremental strength for Azure. Wedbush believes large, “transformational” cloud deals at the company are up more than 50% with momentum heading into the rest of the year.
“Despite multiple/valuation compression and a tightening Fed backdrop, we believe Microsoft’s stock continues to go higher over the next six to nine months as the Street is still underestimating the underlying growth story,” Ives said. “We believe Microsoft is on its way to a $3 trillion market cap over the next 12 months.”
Strength in Microsoft comes even as some see pressure on the wider software sector. In a report this month, analysts at Swiss bank UBS outlined why they remain bullish on Microsoft even as they cut their outlook on the software sector at large, including downgrading Salesforce (CRM) and Adobe (ADBE) stocks.
In short, UBS believes that pandemic trends may have pulled forward more demand for software over the last 18 months than most investors think. This could make more moderate spending growth in coming earnings seasons a real shock for some companies and shareholders.
Microsoft is an exception.
“Migration activity into AWS, Microsoft Azure and Google Cloud is not waning,” the analysts at UBS, led by Karl Keirstead, said. “This trend anchors our confidence not only in Microsoft, but in Snowflake (SNOW), Datadog (DDOG) and others that are indirect beneficiaries.”
Ives reached a similar conclusion. “We believe the Street’s view of moderating cloud growth on the other side of this work-from-home cycle (and a noisy macro) is contrary to the deal activity Microsoft is seeing in the field,” the Wedbush analyst said.
Write to Jack Denton at [email protected]
