Categories Analysis, Technology

MSFT stock: Can Microsoft reach a market cap of $2 trillion by 2022?

MSFT stock has been one of the top performers in the last decade, gaining 731% in value. Comparatively, the S&P 500 and the Technology Select Sector SPDR Fund or XLK have returned 200% and 411% respectively since August 2010. This monstrous rally in MSFT stock has meant that the company has a market cap of $1.58 trillion. So, when will the stock reach a $2 trillion valuation?

Microsoft (NASDAQ: MSFT) is a tech heavyweight with a diversified business model. Its business segments include applications and infrastructure, data and AI, business applications, and gaming.

MSFT acquired GitHub in 2018 which accelerated growth in its applications and infrastructure vertical. GitHub is a platform used by close to 50 million developers with a majority of them working for Fortune 50 companies.

The company aims to build a comprehensive toolchain for developers that is independent of language or framework. Its Visual Studio and Visual Studio Code are steps in that direction as they are among the more popular code-editing tools in the world while TypeScript is also a fast-growing programming language.

Also read: Microsoft Q4 earnings: Bright spots and areas of concern

Microsoft’s Azure is a platform trusted by 95% of Fortune 500 companies for their workloads. Microsoft is the second largest public cloud company after Amazon and is growing at a faster rate compared to the overall market.

Microsoft (MSFT) Q4 2020 Earnings Infograph

The tech giant is also investing heavily in high growth verticals such as data analytics and artificial intelligence. Microsoft forecasts that the connected device count will reach 50 billion by 2030, which will increase the volume of data transfer exponentially.

Microsoft’s portfolio of cloud analytics includes market leading platforms such as Azure Data Factory, Power BI and Azure SQL Data Warehouse. Further, its Business 365 enable organizations to create digital feedback loops to optimize outcomes.

The ongoing pandemic has driven demand for collaboration tools such as Microsoft Teams as well as gaming sales higher.

Microsoft (MSFT) Q4 FY20 earnngs - Azure revenue

Stellar Q4 results

Microsoft recently reported its fourth quarter of fiscal 2020 results and saw a 13% growth in revenue. MSFT sales were $38 billion in Q4, and above analyst forecast of $36.5 billion. Revenue was driven by a 47% growth in Azure while cloud sales were up 17%.  

The pandemic also boosted Xbox content and services sales by 65% to $1.2 billion. This was significantly higher than the 2% growth in Xbox sales in the March quarter.

Also read: Microsoft’s Q4 FY20 earnings in a nutshell

The verdict

Analysts expect MSFT sales to grow by 9.6% to $157 billion in fiscal 2021 and 11.5% to $174.7 billion in 2022. Comparatively, its earnings growth is forecast at an annual rate of 15% in the next five years.

Compare these figures to MSFT’s forward price to sales multiple of 10x and forward price to earnings multiple of 32x and we can see that the stock is trading at a premium. However, growth stocks tend to trade at expensive valuations making them attractive in a bull market.

Analysts trading MSFT stock have a 12-month average target price of $227, which means the company will be valued at a market cap of $1.72 billion by August 2021. MSFT has historically outpaced market returns, signifying there is a good chance for the stock to reach the $2 trillion valuation by the beginning of 2022.

Also read: Microsoft Corp. Q4 2020 Earnings Call Transcript

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