The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology  – Senior Analyst at I Know First. 

Microsoft Stock Forecast

Summary:

• Microsoft Q2 2017 earnings report last week revealed that its cloud computing-related products are indeed its biggest growth drivers.
• The Intelligent Cloud segment’s quarterly revenue was up by 8% at $6.86 billion. Azure cloud server computing service’s revenue increased 93% year-over-year.
• Cloud subscription software service Office 365’s commercial subscribers is up 37%. There are now 24.9 million paying subscribers of Office 365.
• The robust growth in Office 365 and Azure revenue helps offset the 5% drop in Microsoft’s More Personal Computing segment.
• I Know First also gives positive algorithmic forecasts for MSFT. Buying it now while it is still below $70 could be wise and/or prudent.

Non-GAAP results of Microsoft’s (MSFT) Q2 FY2017 earnings report last week was $26.1 billion in revenue and $6.5 billion in net income. Revenue was up 2% Year-over-Year, net income was up 6% Y-o-Y. Microsoft achieved this positive growth in spite of the -5% Y-o-Y drop in revenue of its biggest division More Personal Computing, from $12.47 billion to $11.82 billion.

The 81% drop in phone device revenue and 3% decline in Xbox console sales are the reasons why More Personal Computing suffered negative growth in Q2 FY 2017. Negative impact of foreign currency also contributed to More Personal Computing’s Y-o-Y decline in revenue.

(Source: Microsoft)

Fortunately, the excellent Y-o-Y growth in Microsoft cloud products managed to offset the -5% decline in More Personal Computing. The Intelligent Cloud segment posted 8% Y-o-Y growth, with $6.86 billion. Intelligent Cloud’s performance is partly thanks to Microsoft Azure cloud server platform service, which posted 93% growth in sales. Microsoft also announced that Azure compute usage more than doubled than compared to Q2 FY 2016. Overall, server and cloud services products grew 12% Y-o-Y in Q2 FY 2017.

Microsoft’s growth catalysts are now its cloud computing and services. Nadella has successfully steered Microsoft clear out of its failed phone hardware business into a highly-profitable cloud-computing giant.

Azure’s tremendous success is why Microsoft is now threatening Amazon’s (AMZN) leadership in Infrastructure-as-a-Service (IaaS).  Synergy Research Group has officially declared Amazon and Microsoft as the market segment leaders in IaaS and Platform-as-a-Service (Paas).  Synergy Research also reported that IaaS and PaaS segments posted the biggest growth in 2016, 56%, in the $148 billion/year Cloud Market global industry.

The cloud computing infrastructure and services industry is growing at a 25% CAGR too. Microsoft therefore has strong economic reasons to beat Amazon Web Services. Microsoft’s stock price could probably hit $80 if Azure takes 30% share of the global Cloud Infrastructure Service industry. As of now, I believe Amazon Web Services still has the lead with 31% market share.

The chart above also revealed that Office 365’s terrific success made Microsoft a clear leader in Enterprise SaaS (Software-as-a-Service). Synergy Research said Enterprise SaaS also grew 34% last year. Unless Alphabet (GOOG) comes up with a more coherent strategy for its G Suite cloud product, Microsoft will continue to rule the Enterprise SaaS market.

Tight Integration with Microsoft Dynamics, Skype, and other Microsoft collaboration software made Office 365 the de-facto productivity suite for many corporations. The Q2 FY 2017 financial results clearly highlight the continuing growth of Office 365. The 37% Y-o-Y growth in Office 365 commercial seats.

(Source: Microsoft)

Yes, Office 365’s growth is obviously slowing down but as long as it can maintain 30% growth rate for the next 8 quarters, Microsoft will likely have more than 35 million faithful customers.

Conclusion

Long-term growth investors should add MSFT to their portfolios. Nadella has transformed Microsoft into a long-term winner in the $148 billion/year cloud market. The 25% CAGR of the cloud market bodes well for Microsoft. Azure and Office 365 will eventually help Microsoft become the overall king in this fast-growing industry.

Furthermore, Microsoft can quit its phone business entirely and still have a strong presence on mobile devices. This is being achieved through device-agnostic mobile apps like Office 365, SkyDrive, and Skype. Converting Android and iOS device users to become paying subscribers of Office 365 and Skype again helps Microsoft’s long-term ‘cloud-first’ strategy.

My bullish outlook for MSFT is again backed by this stock’s positive algorithmic forecasts from I Know First.

My 12-month price target for MSFT is $70. This is almost in line with the average 12-month price target of $69.88 of TipRanks-tracked analysts.

(Source: TipRanks.com)

I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day, and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm. This allows users to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above 0 in order to fill confident about/trust the signal.

I Know First Success With Microsoft 

I Know First has been bullish on MSFT in past forecasts. On November 9, 2016, an I Know First analyst wrote a bullish article on MSFT, while also providing a bullish forecasts dating back in June 3, 2016. In accordance with I Know First’s self-learning algorithmic forecast from June 3, 2016, MSFT shares rose over 24% to date.

This bullish forecast for MSFT was sent to I Know First subscribers on June 3, 2016. To subscribe today click here.