Microsoft The Long-Term Winner In Cloud? This Analyst Thinks So

• Shares of Microsoft Corporation MSFT are up 16 percent year-to-date, and are trading close to their 52-week high of $54.98.
• Raymond James’ Michael Turits upgraded the rating on the company from Market Perform to Strong Buy, with a price target of $62.
• Microsoft is expected to emerge as a strong player in the cloud segment with its ability to integrate various services, Turits mentioned.

Microsoft is fast emerging as one of the only “hyperscale” hybrid cloud vendors able to integrate Infrastructure-as-a-Service [IaaS], Platform-as-a-Service [PaaS] and Software-as-a-Service [PaaS] with a significant installed base of on-premise server and client software, analyst Michael Turits stated.

About 17 percent of Microsoft’s revenues in FY16 are expected to come from cloud.

Turits added, “[W]e forecast a 6% total revenue CAGR FY16-FY18E, including 6% for Productivity and Business Processes (Office/Dynamics), 9% for Intelligent Cloud (Azure/Server) and 3% for More Personal Computing (Windows -5%, non-Windows +6%), although off lowered FY16 estimates.”

While opex controls are expected to offset to some extent the gross margin decline through FY18 on the shift to cloud, the company is expected to post flat operating margins and 6 percent EBIT growth with long-term EPS growth expected at at-least 8 percent after share buybacks, the Raymond James report stated.

Turits expects Azure to put Microsoft at par with hyperscale vendors like Amazon Web Services. He wrote, “We believe CEO Satya Nadella’s aggressively open strategy toward non-Microsoft platforms (Linux, containers) will make Azure a dominant PaaS as well as IaaS.”

The revenue and non-GAAP EPS estimates for FY16 have been reduced from $93,288 million to $91,803 million and from $2.74 to $2.62, respectively, to account for cloud and currency impacts.