Investor interest in Microsoft (NASDAQ:) stocks remains strong. Over the past year, each dip has attracted more buyers, pushing the software and infrastructure giant's stock to new highs.
Even after a 125% rally since the March 2020 market crash, there is reason to believe the stock has more upside potential. The Redmond, Washington-based company's revenue and profits last month surpassed analyst estimates for the 10th consecutive quarter, showing that Chief Executive Officer Satya Nadella's strategy to make Microsoft the largest cloud computing provider remains on track.
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Microsoft Weekly Chart.
Microsoft's cloud computing business has contributed immensely to its share's 425% gain over the past five years – a period during which Nadella also expanded into other new growth areas. During his tenure, more than $45 billion was spent acquiring companies, including the business social network LinkedIn, video game developers Mojang and Zenimax, and the code storage service GitHub.
These bets have largely paid off. Microsoft's Intelligent Cloud segment accounted for 33.8% of the company's revenue in 2020, making it the largest of the tech giant's key business units for the first time. The unit also increased from 31% in 2019.
Last year, the division posted revenue growth of 24%, compared to the 13% growth in productivity and business processes and the 6% growth of Microsoft's More Personal Computing unit.
In addition, the pandemic has further accelerated the growth of MSFT. Millions of workers and students stuck at home during lockdowns used the company's Teams meeting software to keep in touch and stay connected. Large corporate customers also accelerated their move to the cloud, while younger retail customers bought Xbox gaming subscriptions. a question in the minds of investors: are MSFT stocks too expensive to buy?
Most analysts believe that the relatively expensive stock price appropriately reflects expectations for the company's growth. In a note to its customers yesterday, Goldman Sachs reiterated its call to buy Microsoft, saying the bank sees more gains in the stock after the tech giant announced a price increase for Microsoft 365.
The note read:
"We believe the recent announcement underscores the company's long-term competitiveness and pricing power, particularly with respect to Commercial Office 365, which represented ~18% of total revenue in FY21."
In the first "substantial" cost change since the launch of Office 365 a decade ago, Microsoft said in a blog post last week that the price for its 365 Business Basic plan will increase by 20% to $6 per user, while the price for its 365 Business Basic plan will increase to $6 per user. high-end version of the suite will rise from $32 to $36 per user.
Microsoft justified the move by highlighting three key areas in which its products have advanced: communications and collaboration, security and compliance, and AI and automation. The company also announced it is adding unlimited call-in capabilities to Teams, allowing users to join meetings from virtually any device, regardless of location.
Like Goldman Sachs, Mizuho Bank also reiterated its purchase for MSFT. In a note to customers, the Japanese lender raised its price target for the stock from $325 to $350, saying the price increase in Microsoft 365 will have a "significant" effect in FY23 and beyond.
These bullish sentiments are also reflected in Investing.com's consensus price target for the stock. Of the 36 analysts surveyed, 34 have an "outperform" rating for Microsoft, up about 9% from its current price.
Microsoft consensus estimates.
Chart: Investing.com
Starting point
Microsoft shares have indeed become expensive after a strong rally this year. But in our opinion, the stock is not overvalued.
The current stock price of $304.65 at Monday's close takes into account Microsoft's success in both the short and longer term. In addition, Microsoft pays a healthy $2.24 annual dividend that continues to grow steadily. That makes owning the shares even more attractive.
