Microsoft Shares On A Path Toward $130, Says Morgan Stanley

Software giant Microsoft Corporation MSFT reported Q3 results after the market close Thursday and issued above-consensus revenue guidance for Q4.

The Analyst

Morgan Stanley analyst Keith Weiss maintained his Overweight rating and $130 price target for shares.

The Thesis

Microsoft's revenue growth accelerated to 16 percent year-over-year, EBIT grew 23 percent and earnings per share grew 36 percent, Weiss said in a Friday note.

Commercial Cloud revenues rose 58 percent year-over-year and gross margin expanded 6 percentage points to 57 percent, and overall operating margins grew 190 basis points

The $60 billion commercial business, comprising of server & tools, Windows Commercial and Windows OEM pro has reached a 89 percent annuity mix, suggesting these are durable cash flow streams, the analyst said.

Weiss also noted that LinkedIn revenue growth accelerated to 37 percent, Gaming growth quickened to 18 percent, thanks to strong software and service growth, and Surface revenues climbed 32 percent.

The earnings beat, according to the analyst, came about from the faster revenue growth, improving margins and a lower-than-expected tax rate, which boosted EPS by 2 cents.

The Q3 beat and the above-consensus Q4 guidance suggest that FY2018 EPS estimates may hike by 5 percent, Weiss said. He increased his FY2018 revenue estimate by $1.8 billion and raised its EPS guidance from $3.71 to $3.84.

The firm sees shares of Microsoft moving towards his $130 price target. The analyst did highlight, however, the slowdown in Azure revenue growth, sequential increase in capex in Q3 and tempered FY2019 gross margin guidance as areas to watch for.

Price Action

Microsoft shares have added about 11 percent in the year-to-date period.

Reacting to the results, shares were up 3.46 percent at $97.52 in Friday's pre-market session.

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