Investors Have Underappreciated Microsoft Long Enough

Canaccord Genuity said in a note Wednesday its analysis suggests that investors have underestimated the virtuous cycles Microsoft Corporation MSFT has created by assembling four compelling growth drivers in Office Productivity, Gaming, Marketing and Azure's Platform as a Service.

As such, the firm upgraded shares of Microsoft from Hold to Buy and raised the price target on the shares from $76 to $84.

Analysts Richard Davis and David Hynes believe these drivers set the company up for a sustained period of accelerating growth. This, according to the analysts, would preserve the valuation of the company's stock and even drive a bit of multiple expansion, driving the stock higher.

Growth Vectors

Canaccord Genuity is of the view that investors are missing the explosive potential of eSports. If Microsoft decides to take a plunge into it, the firm believes it could compete with peer salesforce.com, inc. CRM.

The firm also said the 0365 upgrade cycle is obvious and well-known. Additionally, the firm expects its Azure cloud business to grow revenues, and more importantly achieve scale on what is a relatively high fixed cost IaaS/PaaS business.

See also: Attention Microsoft Investors: Get Excited About These 3 Catalysts

5 Years Of Revenue Acceleration Seen

Based on information gleaned from filings' segment information, conversations with the management and a layer of approximations, the firm recast Microsoft's income statement into its view of growth businesses and cash cow/legacy line items. Based on its analysis, the firm has deduced that the company's revenues, on a current run-rate basis, is split between marginally declining assets and high-teens growth segments.

"As the faster growth segments increase as a percentage of the total, aggregate revenue growth should accelerate, which is generally a driver of multiple expansion," the firm said.

Rationale Behind Timing Of Upgrade

The firm noted that a random correction in Microsoft shares or the overall market it had envisaged did not materialize. With analysts focusing on tactical questions like operating expenditure rather than harping on why the company will or won't see sustained or accelerating growth, the firm said the stock has not pulled back much. However, the firm sees this as an opening for it to upgrade Microsoft shares in anticipation that money managers will catch up to its thinking.

Related Link: For Microsoft, The VR Game Is Still Afoot