Can Microsoft (MSFT) Become a $3 Trillion Company?

Microsoft Corporation's (MSFT) stock price has been on a roll since the pandemic began. And it might have more room to grow. The company's market capitalization, which briefly crossed $2.5 trillion earlier this month, may be headed toward $3 trillion in the next six months, according to Wedbush analyst Dan Ives. 

"What we are seeing in the cloud, Microsoft is leading the way. I think that is what we have seen with the stock—it's a re-rating as investors further understand just how this growth story is playing out. Our view is that this is a $3 trillion market cap company," Ives told Yahoo! Finance. He has a price target of $375 and an Outperform rating for the company.

The bullishness from Ives about Microsoft's future is shared by other analysts, with 28 analysts forecasting a 12% increase in revenue to $50.8 billion during the current quarter, according to Yahoo! Finance. 

Brent Thill, analyst at Jefferies Equity, raised the firm's price target to $375 from $345 in October and reiterated his Buy rating for Microsoft stock despite its high price. "The only concern for Microsoft next year is that, when you are continuing to grow at 20%, can you continue that a multi-hundred billion dollar run rate?" he told Yahoo! Finance.

A Cloud Story

While the three prongs of Microsoft's revenue stream—cloud computing, productivity and business processes, and more personal computing—have all profited from the pandemic, it is the cloud division Azure that is largely responsible for investor enthusiasm for Microsoft stock. Microsoft has closed the gap between itself and cloud leader Amazon.com, Inc. (AMZN) by reporting cloud revenue bigger than that of its rival in recent quarters.

On an annual basis, Microsoft has reported double-digit revenue surges. In 2020, revenue from the company's commercial cloud division jumped by 36% from the previous year. In 2021, that figure was up 34% to $69.1 billion. Morningstar analyst Dan Romanoff called Satya Nadella an "elite level CEO" and highlighted the emphasis on Azure for revenue as a "key strategic division" on par with Windows, Microsoft's best-selling operating system that remains a cash cow for the company.

The acceleration toward cloud adoption is expected to remain intact in the coming year as remote work becomes prevalent and businesses move enterprise software and tools, previously installed on their premises, online. For Microsoft, that shift will remain critical to its competitive advantage across all its operating segments. The company introduced cloud versions of its suite of office and productivity tools in 2011, and they have gained significant market share despite the presence of free alternatives like Alphabet Inc.'s (GOOGL) Google Docs.

"We believe that Microsoft's unique ability to move clients from an on-premises Microsoft environment to a cloud Microsoft environment via Azure is a structural advantage. As the cloud theme has evolved, it has become increasingly apparent that companies' IT environments will be hybrid-based for years to come," writes Romanoff from Morningstar.

Road Bumps Ahead?

While the fundamentals for Microsoft stock remain intact, investors and traders might want to leave some room for declines in its price. The stock has shed some of its price gains in recent times. "Sometimes stocks get way ahead of themselves," Miller Tabak's Matt Maley told CNBC in November, naming Microsoft, Tesla, Inc. (TSLA), and NVIDIA Corporation (NVDA) as stocks that might be in line for a pullback.

According to Maley, Microsoft's relative strength index (RSI) was overextended, indicating overbought conditions. Since Maley made that prediction, the company's stock price fell by roughly 9% to reach a nadir of $319.37 on Dec. 3. It has climbed back since and is currently changing hands at $332.33.