stock is getting a boost on Thursday from Rosenblatt Securities analyst John McPeake, who picked up coverage of the software giant with a Buy rating. The analyst’s $301 target price implies a potential gain of nearly 25%.
McPeake views Microsoft (ticker: (MSFT)) as a company with unmatched assets—over a billion devices running the company’s software, the world’s largest developer ecosystem and huge revenue that increasingly comes from recurring sources.
“Microsoft is the most important software company on the planet, with over 1.3 billion devices running Windows 10, over 1.2 billion users of Microsoft Office, 1.2 billion identities in their Azure Active Directory, and a 10-fold increase in daily active Teams users in just the last year to 145 million,” McPeake writes in a research note.
He adds that the company has 756 million members on LinkedIn, and more than 100 million monthly active users on Xbox Live. “The number of mission-critical Excel files number in the trillions, and Microsoft also boasts the largest software-developer community in the world at upwards of 55 million unique users on GitHub,” the analyst writes. “With their Azure cloud-services offering, Microsoft has moved into a share-gaining second place position in cloud computing—and recurring revenue sources are 75% of estimated next-12-months revenue.”
McPeake thinks Microsoft can grow revenue in the mid-teens while expanding operating margins moderately over the next five years, “driving annual earnings per share, and free-cash-flow growth in the mid-teens.” He thinks the stock can appreciate 35% over the next three years—and 50% over five years.
The analyst concedes that at 31 times next 12 months earnings, the stock trades at historically high valuation compared to average 19.4 times over the last decade. He also notes that the stock trades just a little above its historic valuation compared to the
—1.4 times the price/earnings multiple on the index, versus a historic 1.2 times.
But McPeake adds that “over even just the last five years…Microsoft’s revenue composition has moved in a direction that we think supports this significantly higher absolute earnings multiple. At this point Microsoft has far higher revenue visibility and repeatability, which we think increases the long-term valuation of the company substantially versus its historic averages.”
Microsoft stock in Thursday afternoon trading is up 1.4% to $242.31. The S&P 500 is up 0.8%.
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