By any measure, Microsoft Corporation (MSFT) has had a stellar streak in the markets in recent years. The software giant's stock price has been on a roll. It rose by 55% in 2021 and has witnessed an even more astounding price increase of 441% in the past five years. On the way, it crossed $2 trillion in market capitalization and briefly became the planet's most valuable company.
But 2022 is not turning out to be as good. A decline of 6.6% in its stock price last week was a jolt to its run-up. While the fall in Microsoft's valuation was part of a broader selloff in the tech sector, it still gave pause to investor enthusiasm for the company's future price trajectory.
Specifically, will the Microsoft stock deliver fantastic growth, as it has in the past couple of years, or will it change course as the economy stumbles to a new normal?
- Analysts are betting that Microsoft will continue its winning ways in 2022 on the back of continued cloud adoption.
- While the company's long-term story remains intact, its stock price may face some turbulence this year as investors rebalance their portfolios ahead of an anticipated monetary tightening by the Fed.
- Some analysts have forecast a $400 price target for the stock.
The Pandemic and Cloud Boost
The price surge in Microsoft's stock in recent years has been predicated on growth for its cloud division, Azure. The company does not separate out Azure earnings; however, it reported that revenues from the division grew by 50%, continuing a period of double-digit growth rates in the past couple of years.
The long-term trends for Azure look bright. The pandemic accelerated the move toward cloud deployment, and its market is expected to touch $1 trillion by 2030. Microsoft, which ranks second in the cloud sweepstakes, is fast closing the gap with market leader Amazon.com, Inc. (AMZN). Importantly, it is doing so not by siphoning customers away from Amazon but by bringing new ones to the market.
If one were to believe analysts, Microsoft's customer roster will only grow in the future. The company already has a sizeable base of corporate clients who use its best-selling on-premise productivity software and data management solutions. As they migrate toward the cloud, most of these clients would prefer to stick to the same provider instead of shifting to a new one, according to analysts at Morgan Stanley.
The pandemic has also shone a light on other profit centers within the company. Notably, its remote conferencing software Teams has become a blockbuster hit, generating double-digit revenues and profits during the period. Microsoft is an early mover in the metaverse, an industry that is expected to reach $800 billion by 2024, with its productivity suite that enables remote collaboration between teams at work. The company's balance sheet is also looking spiffy, with an operating income figure that is trending upwards and stockpiled cash reserves.
Analysts have forecast good things for the tech giant in the future. A majority have Outperform ratings for the stock and forecast a price increase. For example, Credit Suisse analysts have set a price target of $400 for its stock and stated that its revenue will grow by mid- to high-teens percentages in the next five years. Its earnings growth will be even more striking, ranging from the high teens to more than 20%, "driven by share and ongoing share repurchases."
The Bear Case Against Microsoft
While the long-term trends should help Microsoft report profits in the future, the road to $400 may still be a bumpy one. The turbulence may be a result of reasons related to its operational fundamentals. Parts of the company's business are vulnerable to competition and market trends. For example, Alphabet Inc.'s (GOOG) Google apps, which offer a completely cloud-based solution, are snapping at Microsoft's heels in the productivity software market.
The company’s metaverse offerings, while impressive, could suffer from a brain drain as competition in the industry heats up. Already, Meta Platforms, Inc. (FB) is reportedly poaching away staffers from Microsoft's metaverse team. The defection of key personnel to rival companies could leave the company trailing in a sector that is expected to become a big money-spinner in the future.
Then there are the market's fundamentals. Microsoft's stock price has benefitted from the flow of money into Big Tech. A rebalancing of portfolios by investors, away from the industry, could adversely affect its share price. The stock, which trades at a price-to-earnings ratio of 34.31, has been called "overvalued" earlier.
One way or another, 2022 might prove to be a rockier road for the Microsoft stock as compared to 2021.