On Thursday, citing the strong growth opportunity in the cloud, Pacific Crest analyst Brent Bracelin said there's still plenty of room for stocks like Microsoft to fuel many portfolios. "After a 10.8% sell-off across our coverage list in 4Q16, with six stocks declining by more than 20%, we enter 2017 with several high-quality cloud franchises that have compelling growth prospects yet are valued at favorable entry points," Bracelin explained in his research note. (See also: What Will Drive Microsoft Stock in 2017?)
With 12% returns in 2016, which topped the 9.55% rise in the S&P 500 (SPX) index, Microsoft ended the year on a strong note, including 21% returns in the last six months, thanks to CEO Satya Nadella's cloud-first strategy. And much of these gains were driven by the emergence of the Azure Cloud platform, which is second only to Amazon.com, Inc.'s (AMZN) dominant AWS.
Can Microsoft's cloud duplicate its 2016 success? Bracelin, who has an Overweight rating on Microsoft stock and a $70 price target, believes it's a great possibility. He forecasts that public cloud spending, currently around $58 billion annually, will triple to $205 billion in the next three years. During that span, Bracelin expects spending on SaaS services to surge 20% annually, reaching $129 billion by 2020. (See also: Microsoft's Cloud Push, LinkedIn Deal Dominate 2016.)
Bracelin is not alone with his bullishness. Citing strong growth opportunities in Microsoft's Azure cloud platform, Goldman Sachs analysts Heather Bellini last month raised her price target on Microsoft stock to $68 from $60. "We believe the shares are poised to more consistently outperform in the year ahead on the back of sustained traction in its cloud offerings," Bellini said in a research note to investors.
Microsoft stock closed Thursday unchanged at $62.30. Bellini's price target assumes a premium of about 10% from current levels. Microsoft has a consensus Buy rating and an average price target of $65. The shares have risen 0.26% so far in 2017. (See also: 3 Gadgets That Impressed Tech Geeks at CES 2017.)