The relentless rally in Microsoft stocks (NASDAQ:) shows no sign of peaking.
The company made history last week when it became the second US publicly traded company after Apple (NASDAQ:) to reach a market cap of $2 trillion. The Redmond, Washington-based company reached this milestone as the share price continues to rise, hitting another record high yesterday, closing at $271.40.
Microsoft Weekly Chart.
Even after gains of this magnitude – pushing stocks up 20% so far this year and 40% in 2020 – analysts still see more upside potential. Microsoft, which outperformed Apple and Amazon (NASDAQ:) this year, is thriving under CEO Satya Nadella, who has transformed the company into the largest seller of cloud computing software.
What attracts investors is the belief that MSFT has more in store for the long term as it expands into areas such as machine learning and cloud computing. Morgan Stanley analyst Keith Weiss reiterated a buy recommendation for Microsoft stock with a price target of $300, but said in a recent note that the market is undervaluing the company.
"While bears fear pressure on the multiplicity if EPS growth slows, we would argue that current multiplicity does not accurately reflect forward EPS growth."
Over 90% of Wall Street analysts recommend buying Microsoft, while none have the equivalent of a sell recommendation for the stock. The average price target points to an increase of approximately 11% from current levels. Microsoft's 400% spike
Microsoft's cloud computing business was the main driver behind its stock's 426% gain over the past five years — a period in which Nadella also branched out into new growth areas. During his tenure, he spent more than $45 billion 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 business accounted for 33.8% of the company's revenue in 2020, making it the largest of the software and infrastructure giant's key business segments for the first time, up 31% in 2019 The division posted 24% growth in revenue last year, compared to the 13% growth in productivity and business processes, and the 6% growth of Microsoft's More Personal Computing unit.
And 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 customers bought Xbox gaming subscriptions.
"More than a year after the pandemic, digital adoption curves are not slowing down. They are speeding up," Nadella said in a statement in April.
In short
As Microsoft's impressive rally continues, the stock has not yet reached the point where it has become expensive. The company is expanding its market share into new areas of the digital economy, such as cloud computing and AI, while maintaining its leadership position with legacy software products such as Windows and Office.
This sustainable advantage will help the company achieve sustained double-digit growth in sales, earnings per share and free cash flow, making it a reliable technology stock to own over the long term.
