Technology

Why Wall Street Grows More Aggressive About Microsoft Upside in 2020

Jon C. Ogg

Published: January 9, 2020 11:55 am

Last Updated: January 30, 2020 11:25 am

The stock market performance was nothing short of stellar in 2019. The Dow Jones industrials rose over 22% and the S&P 500 rose by almost 29%. Most investors should be looking forward rather than backward, and that means setting expectations for 2020. One rule that no investor can ignore now is that technology has become nothing short of critical for the stock market’s performance. 24/7 Wall St. has submitted a baseline expected return of 7.4% for the Dow in 2020, but just a few simple developments would take that up to an expected 12% gain in 2020.

With the leadership of technology firmly in hand, Microsoft Corp. (NASDAQ: MSFT) is one company that could see its stock contribute handily toward the upside in stocks this year. It seems that Wall Street has already started calibrating its 2020 upside expectations for Microsoft.

Microsoft closed out 2019 at $157.70 a share, after a total return of 55.3% made it the second best-performing Dow stock (behind the 86% gain for Apple). The stock also ended the year with a 1.3% dividend, a 52-week range of $97.20 to $159.55 and a Refinitiv consensus analyst target price of $163.63. In short, the simple 3.8% expected gain would come with an expected total return of 5.1%, if the dividend is factored in. Most investors might not want to chase a 5% return potential after such an outsized gain of 10 times that amount the prior year.

The reason that Microsoft was listed as one of the top potential upside contributors at the start of 2020 is that Wall Street’s targets in many cases were exceeded after its shares rose more than 12% just in the final 10 weeks of 2019 alone, after breaking out from the $10 resistance line. It’s easy to assume that analysts would not want to suddenly jettison their Buy and Outperform ratings (about 90% rate it as Buy/Outperform), and analyst price target hikes already are being seen.

Two key calls for upside in Microsoft were seen on Thursday, January 9, 2020. Cowen reiterated its Outperform rating and raised its target price to $180 from $165. Wedbush Securities was even more aggressive when it reiterated its Outperform rating on Microsoft and raised an already aggressive target price of $185 to $195. On Wednesday, January 8, 2020, Morgan Stanley reiterated its Overweight rating and raised its target to $189 from $157.

The consensus target price was already up at $165.20 on last look, and it is expected to go higher after these new targets are factored in. Again, that compares with a year-end consensus target price of $163.63. It’s also important to consider that Microsoft closed up 1.6% at $160.09 and hit a new all-time high of $160.80 just one day earlier — and shares went above $162 on Thursday.

It is currently impossible to not tally up Microsoft without any references to Apple Inc. (NASDAQ: AAPL) and to Amazon.com Inc. (NASDAQ: AMZN) due to the comparisons and competition. Apple and Microsoft were the only two companies with a $1 trillion-plus market capitalization rate, followed closely by Amazon at almost $950 billion and a history of having seen a $1 trillion market cap last year.

As Wedbush’s Daniel Ives had the top target on Microsoft, his main point is the potential cloud wins against Amazon and the outlook for that $10 billion JEDI pending contract from the U.S. Department of Defense. His report synopsis even offered a higher price target potential for Microsoft:

Based on our recent checks for FY2Q20 (Dec) we feel incrementally confident in our bullish thesis on Microsoft for the coming year with our bull case valuation now $210. We are also raising our base case valuation from $185 to $195 given the stronger than expected Azure deal flow we are seeing in the field as Redmond remains in an enviable position heading into 2020 on the heels of its cloud success as it continues to fire on all cylinders around Office 365 and its Azure strategic vision.

As for the enterprise market favoring Azure over AWS and for the expected JEDI outcome, Ives further said:

Enterprise customers and partners we have spoken to over the past few weeks indicate a clear acceleration of larger and more strategic enterprise cloud deals as Redmond is poised to win the majority of the next phase of cloud deployments vs. the likes of Amazon and Bezos. To this point, we continue to believe the ripple effect from Microsoft’s landmark JEDI deal victory announced by the Department of Defense in October will be felt for years to come on both the government and enterprise fronts and thus indicates a seminal moment in the cloud battle between these two stalwarts. We believe JEDI is a microcosm (we are seeing a number of other federal cloud deployments up for grabs over the coming months) of what we are seeing play out across the entire enterprise landscape; clearly Amazon won the first phase of cloud spending, but this next phase of cloud will be dominated by Redmond as it gains share and significantly narrows the gap over the coming years.

Morgan Stanley’s Keith Weiss also sees more aggressive ramping up in the public cloud adoption being a positive for Microsoft. The firm now sees Microsoft as having large distribution channels and a large installed base helping margins grow, which will lead to a much better than $1 trillion market cap. Weiss even noted that Microsoft might be the best cloud provider for corporations that need to integrate the public cloud with on-premise server computing.

While many analysts have yet to make major changes on Amazon’s ratings, Apple has seen its share of analyst target hikes. Wedbush’s Ives also became the most aggressive with a $350 target price, and Apple’s 2019 year-end price of $293.65 has already seen a new high of $310.00. Its year-end consensus target price of $266.22, which was handily under its year-end closing price, already has gone above $273 and should continue ratcheting higher as Wall Street plays catch up.

Meanwhile, Jefferies also joined in the most recent Apple analyst upgrade brigade. The firm already had a Buy rating but raised its target price to $350 from $285, and an earlier downgrade by Needham to Buy from Strong Buy still came with a target price hike from $280 to $350.