Microsoft (MSFT 1.57%) stock could hit $160 within 12 months -- at least according to Wedbush Securities analyst Daniel Ives. On Thursday, the analyst reaffirmed his $160 price target and an outperform rating for the stock, representing 15% upside. This would notably come on top of a 25% gain for the tech stock over the last twelve months.
Ives' bullishness for the stock focuses on the potential of the company's cloud computing business. Here's a closer look at the analyst's take on Microsoft -- and why he may be onto something.
Image source: Microsoft.
Microsoft's most important catalyst
In a note to clients (quoted by Barron's) on Thursday, Ives wrote: "We are bullish on MSFT over the next year given our thesis that Azure's cloud momentum is still in its early days of playing out within the company's massive installed base." Ives also estimated that corporate technology workloads in the cloud will increase from 32% today to 55% in 2020, benefiting Microsoft.
It's true that Microsoft is seeing impressive momentum in its cloud computing business, Azure. Azure revenue increased 64% year over year in fiscal Q4, or 68% in constant currency. In addition, that had a material impact on Microsoft's commercial cloud business, which includes three of its most important cloud-based offerings for enterprises: Office 365 Commercial, Azure, and Dynamics 365.
Microsoft CFO Amy Hood detailed the company's momentum in the cloud during its fiscal fourth-quarter earnings call:
Customer commitment to our cloud platform continues to grow. In FY19, we closed a record number of multimillion-dollar commercial cloud agreements, with material growth in the number of $10-million-plus Azure agreements. Commercial bookings growth was significantly ahead of expectations, increasing 22% and 25% in constant currency, driven by strong renewal execution and an increase in the number of larger, long-term Azure contracts.
Shares do look attractive
Ives is right about Microsoft stock looking attractive at this level. Though its $1.055 trillion valuation may seem over the top at first glance, investors should keep in mind that the company generated $38 billion in free cash flow in the trailing 12 months alone; this is up from $32 billion in fiscal 2018 and $31 billion in fiscal 2017. Furthermore, Microsoft's strong fiscal fourth quarter suggests the momentum will continue.
The company's cloud computing business, in particular, could be a major driver for Microsoft in fiscal 2020. As Azure's revenue scales and begins attracting larger customers, the cloud computing business is garnering a higher gross profit margin. This means the fast-growing business is having an outsize impact on the bottom line.
Highlighting this trend, Azure is giving Microsoft's important commercial cloud segment a significant boost in profitability. "Commercial cloud revenue was $11 billion, growing 39% and 42% in constant currency," explained Hood on the call. "Commercial cloud gross-margin percentage increased 6 points year over year to 65%, driven again by significant improvement in Azure gross margin."
With Azure growing fast and becoming a greater driver of Microsoft's profits, fiscal 2020 looks poised to be a great year for the software giant.
