Although Microsoft (NASDAQ:MSFT) has rallied nearly 50% over the last couple of months, Microsoft stock is likely to climb further in both the short term and long term.
In the short term, the company’s more heralded catalysts – the growth of its overall cloud business, video games, Teams and the work-from-home trend – will drive the stock higher. Over the longer term, lesser known catalysts, sparked by the ingenious decisions of the company’s CEO, will propel the shares far above their record levels.
Let’s take a look at the less famous, longer-term drivers first.
Longer-Term Catalysts
Under Microsoft’s highly successful and innovative CEO, Satya Nadella, the company is launching new, cloud-based products tailored to the needs of the sectors that are most likely to be successful over the long term.
For example, the tech giant, in collaboration with FedEx (NYSE:FDX), has developed FedEx Surround, which enables companies to analyze supply chains. With the product, FedEx will be able to monitor the location of the products it’s shipping “and use AI to find new streamlined shipping options,” according to Seeking Alpha.
Similarly, Microsoft has unveiled “Cloud for Healthcare,” which enables collaboration among healthcare providers and advanced data analysis. It also provides tools that “protect health information,” according to the company.
By tailoring its multiple tools to meet the needs of the world’s strongest sectors, including e-commerce and healthcare, the company will increase its market share in those spaces. And as these sectors grow, Microsoft’s revenue and profits will be meaningfully boosted.
Further, the strategy gives the company a good way to continue to gain market share against the leading cloud player, Amazon (NASDAQ:AMZN), which can’t match the overall breadth and depth of Microsoft’s IT products. In other words, companies will realize that when they buy Microsoft’s cloud infrastructure, they can also acquire many other highly useful, integrated IT systems that they won’t be able to get from Amazon.
Finally, a Seeking Alpha columnist pointed out that, with the various tools that Microsoft has built or acquired, companies can securely manage and improve their databases. In the future, the company “will offer enterprise companies a secure private environment to host their code and distribute their software packages,” the columnist stated. With data and security becoming paramount to most companies today, there will be huge demand for Microsoft’s products that can enhance databases and protect companies’ information.
Shorter-Term Catalysts
As I predicted in my March 19 column on Microsoft, it appears that the company’s cloud business and its Teams collaboration product have both done well during the pandemic. Specifically, the revenue of its Azure cloud business surged 58% year-over-year in its fiscal third quarter that ended in March, while the number of Teams’ daily active users jumped by 31 million in Q3 versus Q2.
Moreover, Microsoft reported that “remote work and learn scenarios” had driven “increased cloud usage,” while its sales of Windows licenses also benefited from the work-at-home trend. Among the company’s products that got a boost from more people working at home were Teams and Azure, its main cloud infrastructure offering. The company added that its PC software business, its security offerings and its gaming unit were all lifted by the mass closures around the world.
On the negative side, the company was hurt by “supply chain constraints,” reduced advertising revenue, and lower spending on its software licenses by small and medium businesses.
But Microsoft reported that its supply chain difficulties eased late in the quarter. Meanwhile, advertising historically has made up a very small portion of the company’s overall sales. Finally, although the company’s results could be meaningfully impacted by the difficulties facing small and medium businesses, all of its other positive near-term catalysts should more than offset that negative driver.
The Bottom Line on Microsoft Stock
In the near term, Microsoft’s results should be boosted by strong demand for Azure’s offerings, video games, its PC software, its security products and Teams. Over the longer term, Nadella’s efforts to tailor cloud offerings to the needs of strong sectors and bundle its products should greatly improve the company’s results.
Meanwhile, as another InvestorPlace columnist, Luke Lango, pointed out recently, the valuation of Microsoft stock remains attractive. Consequently, I would recommend buying the shares at their current levels.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Lyft, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any of the aforementioned securities.