Microsoft: $120, Here We Come – Barron’s

With Microsoft’s (MSFT) share price up almost 30% over the past year, and bouncing off a multi-year high, it seems like an odd time for an analyst to suggest buying the stock.

Microsoft CEO Satya Nadella.

But Canaccord Genuity analysts Richard Davis and David Hynes upgraded the tech titan today from a Hold to a Buy and hiked their 12-month price target from $76 to $86 a share, arguing that even at these prices, investors are underestimating future growth.

In fact, the pair expect revenue growth to accelerate over the next half decade, and see Microsoft’s share price reaching $115 to $120 by the end of 2020.

Investors have underestimated the virtuous cycles that Microsoft has created by assembling four compelling growth drivers in: (1) Office Productivity; (2) Gaming; (3) Marketing; and (4) Azure’s Platform as a Service. Our model teardown suggests that these drivers set the firm up for a sustained period of accelerating growth. In our experience, accelerating growth should at least preserve MSFT’s current valuation and perhaps even drive a bit of multiple expansion, which will continue to drive the stock higher.

… Looking out longer term, we perform a 3 year IRR analysis on page 11 of this note, in which we illustrate that MSFT shares could reach $115-120 by the end of C2020, implying a mid-teens IRR over the next 3 years. Shorter-term, we are increasing our price target to $86, which essentially rolls forward Microsoft’s current 16x multiple onto our newly introduced C2019 FCF estimate of $37.4B and assumes $56B in prospective net cash and ~7.65B fully diluted shares outstanding.

Davis and Hynes say they had hoped for a “random correction” in the stock. But that hasn’t happened, with Microsoft shares up almost 30% over the past year. So why are they upgrading the stock now?

…We have noticed that analysts are increasingly focused n tactical questions like OpEx rather than thinking about why Microsoft will or won’t see a sustained, or as we suggest, accelerating rates of growth. While this narrative has not pulled the stock back much, it does suggest an opening for us to upgrade MSFT in anticipation that money mages will catch up to our thinking.

Ay $75.45 a share, Microsoft is up more than 1% in pre-market action.


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