Stock Deconstruction

Where will Microsoft's share price be in 5 years

Over the past 5 years, Microsoft's [MSFT] share price has gained an astronomic 249%, and there is little sign of it slowing down. CNBC recently highlighted that 2019 was the company's best year since 2009. CNBC points out that Microsoft gained 55.3%, narrowly missing out on 2009's 56.8% share price gain.

Overall, Microsoft contributed 7% of the S&P 500's gains in 2019. Only Apple [AAPL] contributed more. Cloud computing played a big part, as has the success of Windows 10. But can Microsoft’s share price keep up the pace in the long-term?

249%

Microsoft's share price gains over the past 5 years

  

Microsoft's growth drivers for the next 5 years

Ongoing margin potential

Margins look set to be strong in 2020. At least that's according to Morgan Stanley analyst Keith Weiss. Weiss thinks Microsoft will see "durable double-digit gross profit growth" this year and has upped his price target from $157 to $189, a hefty 17% upside on the current share price. In the analysis, Morgan Stanley points to strong margin potential compared to any concerns over cloud revenue.

 

 

 

 

Bullish sentiment around Microsoft Azure

Part of Microsoft's success is down to CEO Satya Nadella’s focus on cloud computing through Microsoft Azure. A Goldman Sachs [GS] poll of tech executives showed that Microsoft is the biggest supplier of public cloud services. And those polled expect to keep using Microsoft Azure for more than three years.

That’s a good position for Microsoft to be in, but there could be even more potential longer-term. Right now, 23% of public IT systems are on the cloud, yet Goldman analysts expect this to grow to 43% in three years’ time. If Microsoft can consolidate its hold on the market, then the share price should see more upside.

 

Microsoft wins 10-year US defence contract

Sticking with cloud computing, perhaps the biggest growth driver for Microsoft is a $10 billion contract to handle the US defence service’s cloud computing needs. Named the Joint Enterprise Defense Infrastructure, or JEDI, contract, Microsoft beat out cloud rivals Amazon [AMZN] to provide services for the next 10 years.

Unsurprisingly, Amazon are now protesting the decision. Small wonder considering Microsoft has been chipping away at Amazon's share of the cloud market. In 2018, Amazon’s AWS had a 47.8% share of the cloud market, compared with Microsoft Azure’s 15.5% share, according to Gartner research. However, Azure saw a 59% revenue growth last quarter, compared to AWS's 35%.

$10billion

Valuation of Microsoft's contract with US defence

 

Next generation gaming

Microsoft's Xbox One lost out to Sony's Playstation 4 in the latest round of the video game console wars. But things could be different when next generation consoles come out later this year.

Gaming accounts for 9% of Microsoft's business. For 2020, Xbox is readying the Xbox Series X console. This hunk of plastic will be out at the end of the year and will be going up against Sony's latest offering. If Microsoft can avoid the pitfalls that hampered the launch of the Xbox One, then the new console could be a long-term money-maker. Video game consoles typically have a lifespan of 5 years or more. Throw in the launch of a video game streaming service, and this could be a big area for some time to come.

 

End of Windows 7 support

Microsoft's decision to stop supporting Windows 7 - its 2009 operating system - has seen more and more companies migrate to the latest versions of Windows. In the first quarter of the fiscal year, Windows OEM Pro revenue grew 19%. Windows OEM Pro licenses represent 46% of Microsoft's Windows sales, so any uptick here is good for business.

 

Market Cap$1.25trn
PE ratio (TTM)30.44
EPS (TTM)5.30
Operating Margin (TTM)35.20%

Microsoft share price vitals, Yahoo Finance, 13 January 2020

 

Time to buy?

Microsoft's share price has an average 12-month price target of $166.75. This would see a 3.35% upside on the current share price. Deutsche Bank's Karl Keirstead is more optimistic, upping his price target for Microsoft to $175 from $160. Hitting this would represent an 8.47% upside.

For investors deciding what tech stock to back for the long haul, Microsoft carries a 30.58x price-to-earnings multiple. That's lower than both Amazon (83.44x) and Alphabet (30.68x). If Microsoft experiences another 5 years that are anything like the previous decade, then investors should be rewarded.

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