What do cloud computing, digital transformation, productivity, enterprise automation and security all have in common? All are secular growth trends powering Microsoft’s (MSFT) top-line, according to Morgan Stanley’s Keith Weiss.
Couple those mega trends with the “strong operational efficiency driving margin expansion,” and the result is a company that will reach $20+ in EPS in 5 years time.
We are now approaching the mid-cycle phase on the economy’s path to recovery, says Weiss, who believes investors are on the lookout for assets with “strong secular growth drivers, solid pricing power and earnings growth able to well outpace inflation.” Microsoft ticks all the boxes.
Weiss thinks the company’s commercial growth opportunities fall into two broad buckets.
One comes from the “information worker base.” This involves the 400 million employees making use of the Office suite which give the company an audience to “upsell additional user-based functionality.” This includes products for collaboration & communication (Teams), analytics & visualization (PowerBI), endpoint security (Defender) and identity management (Azure AD). “Multiplying the average price points of any of these solutions times 400 million yields a large potential market opportunity,” notes Weiss.
The second bucket involves “leveraging its platform for broader enterprise solutions.” Powering the Intelligence Cloud and the Dynamics 365 offerings are “foundational technologies” such as cloud computing, data management and machine learning, amongst others.
This provides enterprises with a way of constructing – or purchasing – the “next generation of modern applications.”
“Said another way,” Weiss explains, “A platform where thousands of companies can spend 10’s of millions of dollars per year.”
Which all position Microsoft to outperform against multiple secular growth trends which Weiss estimates will show a 15% revenue CAGR through CY26.
But it’s not only the top-line which will benefit. As Azure pivots towards “higher value solutions” and the company continues to operate “very efficiently,” Weiss sees room for both gross margins (~50 bps per year) and operating margin expansion (to ~47% in FY27).
Great for Microsoft, then, but what does it all mean for investors? Weiss reiterated an Overweight (i.e. Buy) rating on MSFT along with a $372 price target. If correct, investors could be lining their pockets with ~23% gain.
There are no Microsoft contrarians on Wall Street. Like Morgan Stanley, all the other 28 reviews are positive, making for a Strong Buy consensus rating. The average price target sits just above Weiss’s, and at $375.22, suggests shares will climb by 21% over the next 12 months.