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Microsoft CEO Satya Nadella Stephen Brashear/Getty Images
Microsoft CEO Satya Nadella

Microsoft’s ‘Three-Headed Hydra’ of Growth Spurs More Optimism

Azure, Office 365, and Microsoft's gaming business "have all held up well in today's remote economy."

Ryan Vlastelica (Bloomberg) -- Microsoft Corp. analysts have been growing more optimistic about the software company ahead of its fourth-quarter results later this week, with multiple firms raising their price targets on the strength of its cloud-computing business.

At least seven firms have raised their targets over the past week, including four that did so on Monday or over the weekend. Those moves follow both Wedbush and Morgan Stanley earlier this month. The steady drumbeat of higher targets has contributed to Microsoft shares rallying more than 50% off a March low; the stock rose 2.2% on Monday.

The average price target currently stands at around $219, up from about $165 at the end of 2019. Even with the recent share-price advance, the average target implies upside of about 6% from current levels.

That Microsoft analysts, in aggregate, see room for further gains stands in contrast to other mega-cap technology stocks. Apple Inc.’s average target implies downside of more than 4% from its current level, while Inc.’s stock trades about 4% above its average target. Microsoft’s return potential is also slightly higher than that of Google-parent Alphabet Inc. or Facebook Inc.

The growing bullishness about Microsoft’s prospects is largely due to what Raymond James dubbed its “three-headed Hydra” of growth, a reference to its Azure cloud-computing products, Office 365 and its gaming business. All three “have all held up well in today’s remote economy,” the firm wrote. This was echoed by Stifel, which wrote that Microsoft was “well-positioned across major secular themes,” and that it “should be a key beneficiary” of long-term growth in cloud computing.

Jefferies called the company “one of the best pillars in software,” based on its durable double-digit revenue growth and expanding margins, but cautioned that its valuation was near the highest in nearly 20 years, which is “elevating execution risk.”

Microsoft’s results are scheduled to come out after the market closes on Wednesday. Currently, the options market is pointing to a move of 4.5% the day after the report, which would be significantly larger than the 1.9% reaction Microsoft typically sees after it reports.

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