Microsoft could reach $1 trillion in valuation this year, says Morgan Stanley

Microsoft's public cloud Azure is likely to be the key growth driver in the next few years. Gaming business Xbox and newly acquired LinkedIn will be significant players too.  

The race for America’s — and the world’s — first trillion-dollar corporation has begun. It is most likely that one out of the top three consumer tech giants — Apple, Amazon, Alphabet — will breach the $1 trillion mark first, either this year or early next.

Apple, of course, leads the pack with a $870 billion valuation, while Amazon surpassed Google-parent Alphabet last week to become the second-most valuable company at $768 billion. But, there could be a fourth player in the race too.

Analysts at global investment giant Morgan Stanley have released a new forecast stating Microsoft is on the verge of crossing a trillion-dollar in valuation within a year.

Riding on strong growth in its cloud computing unit, that includes the Office 365 software suite and the Azure hosting business, Microsoft has emerged as a strong contender for the 12-figure valuation. It is currently valued at $650 billion.

In the past 12 months, Microsoft stock has gained 44 percent, and the software giant has generated $32.3 billion of free cash flow and $22.1 billion in net income. For it to cross $1 trillion, the stock has to grow 50 percent this year, which might be improbable but not entirely impossible given the surge in S&P technology stocks lately.

Investors are bullish on Microsoft’s cloud computing platform, Azure, that is the No. 2 player behind Amazon Web Services (AWS) in the infrastructure-as-a-service (IaaS) market. Azure is doubling its revenues year-on-year and is expected to be a strong growth driver until 2020 and beyond. The renewed focus on cloud triggered by CEO Satya Nadella, who took over Microsoft’s reins from Steve Ballmer in 2014, is paying off.

In its last earnings call, Microsoft CFO Amy Hood stated:

“Azure revenue grew 90 percent and 89 percent in constant currency, and Azure premium revenue grew triple digits for the 13th consecutive quarter. Our unique ability to provide a distributed hybrid model for the intelligent cloud and intelligent edge continues to attract customers to Microsoft.”

Microsoft competes with Amazon, Google, Oracle, Salesforce, IBM, Cisco, Adobe, etc. in cloud. Analysts expect Azure adoption to grow to 44 percent of workloads in the next three years from its current 21 percent. It is likely to be the key cash flow and earnings driver for the software behemoth.

Morgan Stanley analyst Keith Weiss wrote in the forecast: 

“A Public Cloud solution spanning from core Infrastructure Services (eg. compute, storage), to compelling Platform-as-a-Service capabilities (eg. data, identity, analytics, machine learning), and up the stack to the application layer (eg. productivity apps, front office apps, core financials) differentiates the Microsoft Public Cloud offering from cloud giants Amazon and Google.”

Other business divisions likely to play a key role in the race for $1 trillion are gaming (Microsoft owns both hardware and software for Xbox products) and LinkedIn (professional networking platform which Microsoft acquired for $26.2 billion in 2016). 

During the quarterly results announcement in November 2017, Microsoft said that LinkedIn was witnessing record levels of engagement and was on track to exceed 21 billion sessions in a calendar year. ‘Jobs’ visitors on the platform grew 65 percent year-on-year. Messages sent also increased by 40 percent in 2017.

Nadella said,

“From the outset, priority No. 1 was to ensure that LinkedIn on its own could accelerate its mission and growth, while retaining its culture as part of Microsoft. Nearly one year in, we are ahead of plan, with LinkedIn contributing positively to earnings per share.”

Perhaps the failed Nokia acquisition and the doomed smartphone business have finally been compensated for. On to $1 trillion then!