Why This Microsoft Analyst Says A Security Awakening Is 'Real,' Company A 'Core Growth Holding In Cloud'

After attending meetings at the RSA Conference 2020 being held this week in San Francisco, one analyst at Piper Sandler came away convinced about the prospect the security segment holds for Microsoft Corporation MSFT.

The Microsoft Analyst

Brent Bracelin maintained an Overweight rating on Microsoft with a $199 price target. 

The Microsoft Thesis

The security awakening at Microsoft is real, with the M365 bundle that includes security bundles now accounting for more than 25% of O365 commercial seats, Bracelin said in a Wednesday note. (See his track record here.)

The analyst sees the mix shift meaningfully uplifting ARPU, given the list price is 60% higher for M365 E3 versus O365 E3.

"The 'security awakening' contributed to accelerating O365 growth last quarter," he said. 

Assuming an annual incremental uplift of $80-$100 for M365 E3, the analyst estimates that every 25% conversion could add about $4 billion to $5 billion to Microsoft's revenue. Additional security and compliance add-ons in M365 E5 could lift revenue even further, Bracelin said.

See Also: Microsoft CEO: 'Technology Is Both A Tool And A Weapon'

The analyst sees merit in Microsoft extending further into security, given security is a large $80-billion total addressable market that is highly fragmented and ripe for consolidation, in his view.

Additionally, digital security is the key to increase enterprise trust required to drive cloud penetration from 12% this year to north of 50% by 2027, he said. 

Citing acceleration in O365 commercial growth due to rising M365 security attach-rates, Piper Sandler said the economic benefits of expansion into security can be material for Microsoft.

"Investments into new products such as Microsoft Threat Protection (MTP), Azure Sphere, and Azure Sentinel combined with open partnerships with 100+ MISA security members showcases an elevated level of commitment into digital security software optimized for cloud," Bracelin said. 

Microsoft is a core growth holding in cloud, the analyst said, adding that he's The optimistic the digital security-cloud combo can become both an "economic driver and competitive differentiator" for Microsoft over the longer term.

MSFT Price Target

The stock closed Wednesday's session 1.25% higher at $170.17.