Microsoft (NASDAQ:MSFT) is the odds-on favorite to be the first company to cross the $2 trillion market cap threshold according to Wells Fargo Securities analyst Philip Winslow, citing strong growth in Microsoft's Azure cloud computing business. He believes that the stock price will grow 55% from current levels, pushing the company's market cap to that rarified level.
"We believe the COVID-19 pandemic has created a zeitgeist moment for [cloud computing] as a whole -- changing [chief information officers'] cloud strategies forever ... from which we expect Microsoft Azure to disproportionately benefit as the enterprise cloud," Winslow wrote in a note to clients."
Winslow went on the say that Microsoft was "narrowing the dollar revenue gap" between Azure and Amazon.com's (NASDAQ:AMZN) industry-leading Amazon Web Services (AWS), while simultaneously widening its lead over Alphabet's (NASDAQ:GOOGL) (NASDAQ:GOOG) No. 3 player, Google Cloud. "Although investors have clearly turned positive on Microsoft Azure, we believe the full multi-year impact of Azure's growth potential is still not properly reflected in consensus estimates or the stock's valuation."
Achieving this benchmark isn't as outlandish as it might appear at first glance, and I believe the path to get there is quite reasonable. If Microsoft can continue to deliver revenue growth of about 14% over the next couple of years, resulting in earnings-per-share growth of about 17%, this would provide free cash flow (FCF) of about $68.2 billion by 2023, according to Winslow's calculations. If the market values the company as 30 times FCF, that would push the market cap of $2.2 trillion.
Just yesterday, Evercore ISI analyst Amit Daryanani made the case that Apple (NASDAQ:AAPL), which is currently the market cap leader at $1.389 trillion, would produce share gains of another 70% over the coming four years to boost its valuation above $2 trillion.