Microsoft shares trade at a price/earnings-to-growth ratio of 1.4 times, below the median 1.7 times PEG ratio across the large-cap software universe.
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Microsoft shares have gone quiet. The software giant’s stock is flat for the year to date, trading slightly below where it was at the end of August 2020. If you sold the stock six months ago, you haven’t missed anything.
But Microsoft (ticker: MSFT) continues to crank out stellar financial results and the software giant should benefit through calendar 2021 and beyond from two key themes playing out in enterprise computing: the adoption of cloud computing and a pick up in enterprise IT spending. Morgan Stanley analyst Keith Weiss thinks the stock’s relative underperformance offers investors an opportunity, and on Friday reiterated his Overweight rating on Microsoft shares, taking his target price up to $290, from $285.
In a research note, Weiss asserts that Microsoft’s exposure to the public cloud (Azure), collaboration (Microsoft Teams), data (Microsoft Dynamics), machine learning and security should sustain 13% compounded revenue growth through the June 2023 fiscal year.
“With an accelerating pace of digital transformation ahead, the secular tailwinds behind the broader software segment grow even stronger post the Covid-crisis,” Weiss writes in a research note. “Within this improving demand environment, Microsoft stands well positioned to accrue an even larger share of the IT wallet, particularly as Cloud adoption picks up in larger enterprises.”
Weiss is particularly jazzed about Microsoft’s potential to dominate the cloud market as more enterprises expand their shift away from more conventional computing infrastructure. “As large enterprises more fully participate in this shift to the cloud, we foresee Microsoft share gains accelerating,” he writes. He thinks the company has advantages in both its longstanding relationship with enterprise customers, often spanning decades, and a widespread distribution network that includes both a substantial internal sales team and thousands of partners.
The analyst notes that Microsoft shares trade at a price/earnings-to-growth (PEG) ratio of 1.4 times, below the median 1.7 times PEG ratio across the large-cap software universe.
Weiss sees multiple factors that can drive the stock higher from here. He says that run-rate revenue will expand by about $70 billion over the next three years, driven by growth across the company’s product portfolio. He also sees gross margins expanding by 300 basis points (100 basis points is one percentage point) over the same period, driving 19% compounded average annual growth in operating income. And he thinks the stock can move closer to the company’s historic PEG ratio of 2 times.
Microsoft shares on Friday are up 2.5%, to $232.47.
Write to Eric J. Savitz at [email protected]
