Microsoft Corp. (MSFT) stock is off to another strong start in 2017, with shares up 13.5 percent so far this year. But despite the stock making new all-time highs this year, Microsoft may be well-positioned for impressive long-term earnings growth and even higher share prices ahead.
In a note issued Monday, Morgan Stanley analyst Keith Weiss raises the firm’s price target for Microsoft to $80 and reiterates his “overweight” rating. Weiss says Microsoft is transitioning from a period of unpredictability and uncertainty into a period of earnings growth that will be rewarding for investors.
“With a strengthening secular positioning and rationalization of underperforming portions of the solution portfolio, Microsoft is back to showing durable double-digit EPS growth – and investors should be willing to pay a higher multiple for that growth,” Weiss says.
When investors consider Microsoft’s double-digit earnings growth along with its 2.2 percent dividend, Weiss says the stock’s total return profile should drive the stock higher.
In addition, Microsoft has now made it past several bumps in the road that may have weighed on its valuation in recent quarters.
“Through the first half of [fiscal 2017], the stock digested impacts from the acquisition of LinkedIn, a higher tax rate and modest [foreign exchange] headwinds and now is positioned for continued positive EPS revisions,” Weiss says.
Morgan Stanley estimates the value of Microsoft’s Azure cloud services segment at about $250 billion alone. At a share price of $70, the market is valuing the remainder of Microsoft’s business at only about eight times free cash flow. Weiss says these assets are worth more than their current valuation.
In fact, Weiss says investors are simply not appreciating Microsoft’s relative free cash flow value compared to its large cap technology peers.
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