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Does Microsoft Have More Fuel Left In The Tank?

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Microsoft (MSFT) is one of the largest companies in the world. Given its massive size, investors should consider the firm’s growth prospects before moving forward. After all, with a market cap approaching $2 trillion, it would take considerable growth to push the share price higher.

One clue regarding its growth prospects is the purchases of LinkedIn in 2016 and GitHub in 2018, both of which were solid investments. LinkedIn’s revenues increased from $2.27 billion in 2017 to over $8 billion in 2020. Likewise, the number of organizations using GitHub on a monthly basis increased 70% over the last 12 months. 

Nadella and his cohorts have a history of making savvy acquisitions, and Microsoft’s recent deal-making spree should further drive growth.  

Recent Acquisitions

Last month, Microsoft finalized its acquisition of ZeniMax Media, reflecting the largest deal Microsoft has made in the gaming sector. The move increases the number of creative studios churning out content for the company from 15 to 23. Considering that Microsoft’s gaming revenues jumped by 50% in 3Q21, investors can expect robust growth in the gaming division.

This month, management also announced a deal to acquire speech recognition firm Nuance Communications. When debt is included, the acquisition will cost Microsoft $19.7 billion.  

Described by Wedbush analyst Daniel Ives as “a strategic no brainer,” Nuance’s products and services are used by more than 55% of physicians, 75% of radiologists, and 77% of hospitals in the U.S.  

Designed in part to buttress the already robust growth in cloud services, Nuance’s Healthcare Cloud revenues grew by 37% year-over-year in 2020. Shareholders can expect this deal to create increased revenues.

HoloLens 2 Contract

Another growth driver of note is Microsoft’s HoloLens 2 contract with the U.S. Department of Defense. Projected to bring in $21.9 billion, the deal covers a five-year period with a renewal option for an additional five years. Microsoft will provide up to 120,000 enhanced HoloLens 2 mixed reality headsets to the U.S. army. 

While the deal is a stand-alone success, it could also foreshadow a massive opportunity for the company. According to Fortune Business Insights, the Augmented Reality market is projected to experience a CAGR of 48.6% from 2021 through 2028.

Thriving Cloud Business

Aside from its new purchases, Microsoft’s main product, its cloud-related business, has been thriving. Many of Microsoft’s other divisions are augmenting cloud services in a variety of ways. For example, Microsoft 365 Commercial, which emphasizes secured cloud services, grew revenue by 21% last quarter. Office Commercial, Office Consumer, Dynamics, and Windows Commercial products, along with the gaming division and the newly acquired Nuance Communications, are all intertwined with the cloud to one degree or another. 

In the last quarter, Microsoft’s revenue increased 19% year-over-year while operating income grew by 31%. In contrast, revenue growth expanded by 14% in FY 2020 and 14% in FY 2019.  

Additionally, Microsoft’s robust share buyback program helped increase EPS last year by a stunning 34%. Furthermore, the firm’s gross margins have trended upward over the years, growing from 65% in 2017 to 65% over the trailing 12-month period.  

Wall Street’s Take

Turning to the analyst community, only Buys, 22 to be exact, have been assigned in the last three months. So, MSFT is a Strong Buy. At $298.18, the average analyst price target implies 19% upside potential. (See Microsoft stock analysis on TipRanks)

Conclusion

Although it is prudent for investors to be concerned about the growth trajectory of large, mature businesses, this company shows no signs of slowing down. Admittedly, its shares are a bit pricey, but investors can be confident that Microsoft’s growth will continue for the foreseeable future.  Perhaps now is not the best time to initiate a position in the stock, but Microsoft is a sterling investment worth holding for the long haul.

Disclosure: Chuck Walston had a position in MSFT at the time of publication.

DisclaimerThe information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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