Microsoft Corporation (MSFT) reported fiscal second-quarter earnings on Jan. 26, once again beating analyst estimates by a handsome margin. The company reported earnings per share of $2.03 vs. the consensus estimate of $1.64 for the quarter, demonstrating that the company is not too big to grow. In response to this stellar financial performance, the market has bid up the stock to new highs, with shares up 34% over the past year, but there’s reason to believe that Microsoft is well-positioned to grow exponentially in the coming years.
The cloud business has a long runway for growth
The virus-induced recession accelerated the cloud-related IT infrastructure spending as cloud computing proved to be a critical component of facilitating the stay-at-home economy. As one of the leading cloud computing service providers in the world, Microsoft Azure saw record demand in 2020.
In the post-recession era, many companies are expected to invest in improving their cloud computing capabilities, which is good news for the industry. According to data from Canalys, Azure is the second-largest player in the cloud industry behind Amazon, and the continued growth in this space will help Microsoft grow its earnings in double-digits throughout the next few years. Additionally, Azure revenue gained 50% in its most recent quarter, which is a clear indication of the momentum behind this business segment.
LinkedIn is significantly under-monetized
LinkedIn is by far the most popular social media platform for professionals, and Microsoft strategically acquired LinkedIn a few years ago with a view of monetizing the massive user base of this platform. According to company filings, LinkedIn has more than 700 million users and close to 300 million monthly active users.
There are multiple ways Microsoft is monetizing LinkedIn, including advertising on the platform, with revenue also generated through Marketing Solutions and LinkedIn Learning. LinkedIn is already becoming a must-have tool for any job seeker, and the platform benefits from the competitive advantage as the most widely used social media service by professionals. Microsoft is well-positioned to grow LinkedIn’s average revenue per user by becoming the go-to solution for business-to-business marketing.
Microsoft is making inroads into the lucrative video gaming industry
Xbox Game Pass now serves more than 18 million subscribers, and the platform is well on its way to becoming the Netflix for video games. One of the primary obstacles for the growth of the video gaming industry was the high cost of gaming consoles, and Microsoft’s subscription-based Game Pass service has removed this obstacle. Microsoft is planning to acquire studios to produce in-house games as well, which is likely to drive operating margins higher in the future.
The Office subscription business continues to grow
Back in the day, Microsoft used to distribute Office and Windows products as one-time purchases, and the company found it difficult to mitigate the threat from black-market transactions where consumers who purchased original products distributed it to many others at a fraction of the cost.
A few years ago, Microsoft decided to shift to a subscription-based model where the company would charge a few dollars a month as a subscription fee to provide access to Microsoft Office packages, which is already proving to be a lucrative move. In the first quarter of 2017, the subscription business had 24 million paying customers, and the company reported more than 47 million customers for the three months ended Dec. 31, 2020.
The expected economic growth in Asia and Latin America regions present Microsoft with a good opportunity to grow its subscription customer base because of the company’s strong presence in these markets.
The earnings momentum paints a promising picture
Standardized unexpected earnings, or earnings surprises as it is often referred to, can determine the long-term stock market performance of companies. Microsoft has hit a purple patch from this front as the company continues to top analyst estimates to deliver better-than-expected revenue and earnings, which is a recipe for success from a stock market performance perspective. As illustrated below, the company has topped analyst estimates in each period since the second quarter of 2019.
Wall Street is bullish
Wall Street analysts are bullish on Microsoft’s long-term growth prospects, with 24 Buy ratings and no Holds or Sells adding up to a Strong Buy consensus rating. At $280.73, the average analyst price target suggests 21% upside potential from current levels. (See Microsoft stock analysis on TipRanks)
Takeaway
Microsoft once again delivered better-than-expected earnings as the company continues to benefit from favorable macroeconomic trends. Even though the stock is trading close to historic highs, there is more upside potential considering the ability of the company to grow its revenue and earnings in double-digits.
Disclosure: The author does not own any stocks mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
