Microsoft ( NASDAQ:MSFT ) is a significant force in the world of technology. Its Office and Azure Cloud, Xbox and Teams, Windows, and Dynamics franchises hold commanding market share majorities in most markets. Through most market cycles, the company’s recurring revenue models, such as enterprise license/maintenance agreements, provide stability and growth to both the top and bottom lines. The stock’s valuation has become its biggest detractor, rising from the customary 5–15x EV/EBITDA multiples in the 2002–2014 period to a high of close to 44x late last year. Microsoft stock currently trades at 17.8x forward estimates.
The company has the advantage of legally binding 3-year license and maintenance contracts for businesses and annual subscriptions for most of its cloud offerings, making Microsoft a powerhouse of earnings. We don’t think that competition will materially harm the business within our limited (1-3 month) time horizons; franchises built over decades don’t break down in a few weeks, despite a case being made that its dominance is being gradually undermined by rival offerings that continue to improve in the market. As a result, we advise buying Microsoft stock with a price target of $300 (22% potential upside) and a stop-loss on a consistent basis below $235.
Microsoft Is Dominating the Market
We think Microsoft stock will benefit from a period of relative calm leading up to the election and the generally strong Q4 because the company is on such a solid competitive footing with rivals. As an illustration, data from Microsoft’s Investor Relations site reveals that Azure holds 21% of the market for cloud computing, while AWS holds 34%...
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