KeyBanc: Microsoft Is One Of The Market's Fastest-Growing, Best Cloud Plays

With the focus in cloud computing shifting from IaaS to software amid evolving technologies such as artificial intelligence, machine learning and blockchain, tech companies have been propelled to the forefront. Microsoft Corporation MSFT could be emerging as a runaway winner, according to KeyBanc Capital Markets. 

The Analyst

Analyst Brent Bracelin reiterated an Overweight rating on Microsoft with a $110 price target.

The analyst named the company as one of his favorite cloud platforms to own in software.

The Thesis

Microsoft, which is scheduled to report its third-quarter results after the market close April 26, is well-positioned for another solid quarter of upside, thanks to a continuation of robust secular tailwinds in cloud and digital, Bracelin said in a Wednesday note.

Cloud and LinkedIn are reshaping the company's growth trajectory from 5.9 percent in fiscal 2017 to projected growth of 10-plus-percent in 2018, the analyst said. The services' combined run-rate is expected to top $30 billion in the fourth quarter, representing 29 percent of sales, he said. 

KeyBanc projects the commercial cloud segment will grow revenues at a breakneck pace of 50-plus percent to a $23-billion- plus run-rate in Q3. 

"The combination of Office 365, Azure and Dynamics 365 not only makes Microsoft the largest cloud platform in the world, but also ranks it as one of the fastest-growing among its Cloud Titan peers," Bracelin said. 

KeyBanc forecast a reduction in the company's non-GAAP tax rate from 18 percent in Q2 to 16 percent over the next two quarters. Every 1-percent reduction boosts earnings per share by 5 cents, the analyst said.

Cloud revenues are expected to double to $40 billion-plus exiting next year and $50 billion-plus, the following year, Bracelin said. 

KeyBanc expects free cash flow to approach $6 per share within three years compared to the $4-per-share rate in fiscal 2017. 

The Price Action

Microsoft shares have gained 13 percent in the year-to-date period.

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