Treal giant Microsoft (MSFT) has been a growth engine in recent years. Yes, the company was originally synonymous with PC operating systems, but its focus on cloud computing is perhaps its greatest strength now.
Additionally, Microsoft is showing clear signs of recovery with its robust fiscal quarter and incredible performance in its cloud computing segment.
As such, MSFT stock looks like an incredible long-term play, especially since it’s down 24% year-to-date. We are bullish on the stock.
Cloud Computing – a massive growth catalyst for Microsoft
As previously mentioned, Microsoft initially focused on PC operating systems, but has shifted to cloud computing to offset the decline in demand for PCs and spread risk across multiple revenue streams. This resulted in Microsoft’s cloud computing service Azure, which is in the immediate vicinity of Amazon (AMZN) Web Services (AWS).
Tech giants like Amazon, Alphabet (WELL) and Microsoft have cloud computing segments worth billions of dollars. According to research, IT companies have ignored and underinvested in cloud computing, despite significant growth opportunities.
So the shift to cloud computing presents a tremendous opportunity for Microsoft to continue scaling. Not to mention, Microsoft’s decision to invest in cloud computing with Azure helped the company reach a $2 trillion market cap.
According to research firm Gartner (IT) less than a third of digital work is currently done on cloud operating system platforms, but by the end of 2025 more than 95% of work will be done in the cloud. So the robust growth in the cloud could mean a revolution for Microsoft.
The growth machine doesn’t stop
Microsoft’s fiscal third quarter results, released in late April, were very impressive. The company had revenue of $49.36 billion, up 18% year over year. Not only that, but revenue beat analysts’ expectations of $49.05 billion.
The company attributed some of its third-quarter growth to cloud, with revenue in that segment rising 29%. Additionally, the company generated earnings per share of $2.22 versus expectations of $2.19.
That’s impressive, but what’s shocking are Microsoft’s results in Intelligent Cloud. The company generated more than $19 billion from Intelligent Cloud and saw a 26% increase year over year. Additionally, the company’s CEO, Satya Nadella, mentioned that the number of Azure deals worth more than $100 million increased by over 100% year-over-year.
In contrast, the company’s Productivity and Business Process segment generated revenue of $15.79 billion, beating estimates. Additionally, Microsoft’s revenue for the first three quarters of 2022 was $56 billion, up 25% from the prior-year period. Soaring margins provide Microsoft with operational leverage and allow the company to keep its competitors on their toes.
In its guidance, the company mentioned that it expects robust revenue growth in the coming quarter. However, it also pointed out that some parts of the business could post single-digit growth due to the Russia-Ukraine war and Chinese production shutdowns due to the pandemic. Unfortunately, these macroeconomic headwinds are inevitable, leaving little Microsoft can do.
On the bright side, however, Microsoft ended its third quarter with operating cash flow of more than $25 billion, up 14% year over year. The high cash generation contributes to Microsoft’s healthy balance sheet. The company currently has $104 billion in cash and cash equivalents.
Wall Street’s take on MSFT stock
As for Wall Street, MSFT stock retains a consensus rating of Strong Buy. From a total of 28 analyst ratings in the last three months, 27 buy ratings, one hold rating and zero sell ratings were given.
The average MSFT price target is $347.24, which represents a 35.3% upside potential. Analyst price targets range from a low of $298.18 per share to a high of $411 per share.
The Takeaway – Don’t ignore Microsoft’s potential
Microsoft is a household name in the technology space and a darling for investors. The company has generated billions of dollars in sales and profits, beating analysts’ expectations. Microsoft’s third-quarter reports suggest it’s still on an uptrend.
Additionally, the company’s cloud segment is thriving, which can contribute immensely to its growth story. Given the reach of Microsoft’s businesses, it’s safe to say that the company is a tech conglomerate.
Yes, Microsoft hasn’t escaped the uncertainty in the tech industry, but its financial outlook implies that investors have little to nothing to fear. So, despite its fair share of challenges, MSFT isn’t a stock investors want to write off.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.