by SignalFactory · January 29, 2020 | 08:23:03 UTC
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.
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