If you invested in Microsoft (NASDAQ: MSFT) last year, you have to be pretty happy with your pick. Microsoft stock significantly outperformed the market in 2019, gaining 55.3%. Meanwhile, the S&P 500 index delivered a healthy 28.9% return in its best performance since 2013.
At the current $162.28, that represents an 18.3% upside. On the other hand, the average 12-month price target among analysts is $176.43 — just 8.7% upside.
With that in mind, here’s why Microsoft could once again blow past expectations in 2020.
Raymond James Analyst Raises the Price Target
In his note to clients, Raymond James analyst Michael Turits explained why he had raised his price target for MSFT:
“Our Microsoft checks were strong this quarter with the biggest improvement from resellers that were seeing an uptick in Office 365 E3 to E5 conversions, on increased interest in collaboration and integration of Microsoft Teams and from security including EMS, Azure Active Directory and Azure Sentinel.”
Why would converting from Office 365 E3 to E5 be a big deal? These are enterprise versions of Microsoft’s Office 365 subscription service. Office 365 E3 is the most widely used and requires customers to pay $20 per user, per month. In comparison, Office 365 E5 is the “power” version. It adds significant security upgrades, includes advanced data analytics capabilities and lets companies use Skype as a complete telephone system. Microsoft charges $35 monthly per user for Office 365 E5, so any “uptick” in converting customers would be a big win for MSFT’s bottom line.
Furthermore, both Office 365 versions include Microsoft Teams — the company’s competitor to Slack (NYSE: WORK). Microsoft has been eating away at Slack’s market share, with Teams surpassing it last year as the most popular workplace collaboration tool.
Microsoft’s Azure web services also continue to be a huge source of revenue for the company. The Intelligent Cloud division delivered $10.8 billion in revenue last quarter, and Azure (which is part of that division) saw 59% year-over-year revenue growth. Last October — just two days after the company reported its Q1 earnings — it was announced that Microsoft’s Azure had beat out Amazon’s (NASDAQ: AMZN) Amazon Web Services for the Pentagon’s JEDI project. That 10-year contract adds $1 billion annually to MSFT’s coffers and further raised Azure’s profile as a highly secure web service. Not surprisingly, Microsoft stock got a nice 2.5% pop when that win went public.
How MSFT Will Turnaround the Minimal Negatives
However, it has not all been positive for MSFT. Two disappointments in Q1 were Surface sales (down 4%) and flat Xbox revenue.
This quarter, the division will perform just as poorly — if not worse — than Q1, as gamers hunker down and avoid buying the existing Xbox console. However, look for Surface revenue to pick up. Sales will likely shoot through the roof in the fall when the new Xbox Series X console is expected to be released. Additionally, Microsoft announced all-new Surface laptops and tablets last October, and the new hardware should boost sales in that division.
Microsoft’s last earnings report was in October. The company’s stock had been stalled since the end of June, treading water around the $140 level. When MSFT released its Q1 2020 earnings report on Oct. 23, it beat analyst expectations for both revenue and earnings. That was enough to light a match that once again ignited Microsoft stock. Although it has slipped in the last week, MSFT has still posted a 20.3% gain since then.
Microsoft LONG (Buy)
Enter at: 168.28