Does Microsoft have more fuel in the tank?

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Microsoft (MSFT) is one of the largest companies in the world. Given its massive size, investors should consider the company’s growth prospects before moving forward. After all, with a market cap approaching $ 2 trillion, it would take considerable growth to drive the stock price higher.

One clue to its growth prospects is the purchases of LinkedIn in 2016 and GitHub in 2018, both of which were solid investments. LinkedIn’s revenue has grown from $ 2.27 billion in 2017 to over $ 8 billion in 2020. Likewise, the number of organizations using GitHub on a monthly basis has increased by 70% in the past 12 months. .

Nadella and her cohorts are used to making savvy acquisitions, and Microsoft’s recent trading frenzy is expected to further drive growth.

Recent acquisitions

Microsoft finalized its acquisition of ZeniMax Media last month, reflecting Microsoft’s biggest deal in the games industry. The move increases the number of creative studios producing content for the company from 15 to 23. As Microsoft’s gaming revenue jumped 50% in 3Q21, investors can expect robust growth from the games division. games.

This month, management also announced an agreement to acquire voice recognition company Nuance Communications. When debt is included, the acquisition will cost Microsoft $ 19.7 billion.

Described by Wedbush Analyst Daniel ives as “strategic evidence,” Nuance’s products and services are used by more than 55% of physicians, 75% of radiologists and 77% of hospitals in the United States.

Designed in part to support the already robust growth of cloud services, Nuance Healthcare Cloud’s revenue grew 37% year-over-year in 2020. Shareholders can expect this transaction to generate higher revenues. income.

HoloLens 2 contract

Another growth driver to note is Microsoft’s HoloLens 2 contract with the US Department of Defense. Scheduled to bring in $ 21.9 billion, the deal covers a five-year period with an option to renew for an additional five years. Microsoft will supply up to 120,000 HoloLens 2 enhanced mixed reality headsets to the US military.

While the deal is a standalone success, it could also herald a huge opportunity for the company. According to Fortune Business Insights, the augmented reality market is expected to experience a CAGR of 48.6% from 2021 to 2028.

Growing cloud business

Besides its new purchases, Microsoft’s main product, its cloud-related business, is booming. Many other divisions of Microsoft are improving cloud services in different ways. For example, Microsoft 365 Commercial, which emphasizes secure cloud services, increased revenue by 21% in the last quarter. The Office Commercial, Office Consumer, Dynamics, and Windows Commercial products, along with the games division and new acquisition Nuance Communications, are all closely tied to the cloud to one degree or another.

In the last quarter, Microsoft’s revenue grew 19% year-over-year while operating profit rose 31%. In contrast, revenue growth increased by 14% in fiscal 2020 and 14% in fiscal 2019.

Additionally, Microsoft’s strong share buyback program helped boost EPS by 34% last year. Additionally, the company’s gross margins have trended upward over the years, from 65% in 2017 to 65% in the past 12 months.

Taking of Wall Street

As for the analyst community, only purchases, 22 to be exact, have been awarded in the past three months. So MSFT is a strong buy. At $ 298.18, analysts’ average price target implies upside potential of 19%. (See Microsoft stock market analysis on TipRanks)

Conclusion

While it’s safe for investors to worry about the growth trajectory of large mature companies, this company shows no signs of slowing down. Granted, its stocks are a bit pricey, but investors can be confident that Microsoft’s growth will continue for the foreseeable future. Now might not be the best time to take a position in the stock, but Microsoft is a solid investment worth holding for the long term.

Disclosure: Chuck Walston held a position with MSFT at the time of publication.

Warning: The information contained in this document is for informational purposes only. Nothing in this article should be construed as a solicitation to buy or sell securities.



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