Microsoft (NASDAQ: MSFT) is the second-largest company on the S&P 500 in terms of its market cap that stands at $1.88 trillion at the time of writing. MSFT stock has returned 1,170% in the last decade and shares are up over 400% in the last five years as well.
However, past returns don’t matter much to current investors. You need to know if the stock is a good bet for 2021 and beyond.
Microsoft is a tech giant
Microsoft develops, licenses, and supports software, services, and solutions globally. MSFT is the world’s largest SaaS (software-as-a-service) company and also the second-largest public cloud infrastructure company after Amazon (NASDAQ: AMZN). Its Microsoft 365 Suite provides access to well-known applications such as Word, PowerPoint, and Excel in addition to collaboration tools, cybersecurity solutions, and other enterprise-facing products.
MSFT is a blue-chip dividend-paying stock that is growing top-line at a rapid pace. In the fiscal third quarter of 2021, Microsoft managed to increase its revenue by 19% and earnings by 44%. Despite its enviable growth rates, the stock is down 6% from all-time highs.
In the last decade, Microsoft has expanded its presence in the public cloud space which has allowed the company to offset its dependence on legacy software solutions and diversify its revenue base. The cloud transformation accelerated after current CEO Satya Nadella took over in 2014 helping the tech giant stage a successful turnaround.
Firing on most cylinders
In fiscal 2020, MSFT increased sales by 12% while earnings were up by 14% year over year. While the ongoing pandemic impacted revenue from the enterprise software sales business, it was offset by strong sales in Microsoft’s gaming, cloud, and consumer-facing software businesses.
In the first nine months of fiscal 2021, Microsoft increased sales by 16% while adjusted earnings grew by a stellar 35% year over year, indicating the company continues to benefit from high operating leverage.
MSFT’s revenue growth accelerated due to strong performance in its enterprise software business as well as commercial cloud sales in 2021. In the cloud computing space, Microsoft has seen its market share rise to 20% by the end of 2020, compared to just 14% at the end of 2017. The company has increased investments in these growth verticals as well as focused on regional expansion to gain traction in the public cloud market.
Microsoft Azure- the cloud vertical bagged a $10 billion contract from the Pentagon two years ago. This business grew its revenue by 50% in the last quarter, easily outpacing Amazon Web Services growth of 32%. Microsoft can leverage its software integrations with its cloud business and compete with AWS on pricing.
Further, the company is also one of the largest gaming companies in the world, and Microsoft’s constant upgrade of its gaming consoles allows it to maintain a leadership position. Microsoft enjoys a 90% market share in the office productivity software segment due to its 365 suite of solutions. It also owns one of the largest social platforms for working professionals in LinkedIn that can be monetized easily.
What next for MSFT stock?
Analysts tracking MSFT stock expect the company to increase sales by 16.2% to $166.2 billion in 2021 and by 12% to $186.2 billion in 2022. Comparatively, its earnings are forecast to rise at an annual rate of 16.7% in the next five years.
These impressive growth rates allow Microsoft to support its high valuation. MSFT stock is trading at a forward price to sales multiple of 11.26x and a price to earnings multiple of 32x. Microsoft also pays investors a dividend though it has a forward yield of 0.91%.
Analysts covering MSFT stock have a 12-month average target price of $291 which is 16% above the current trading price.
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