Microsoft (NASDAQ: MSFT) was on a tear in 2019, with shares up roughly 55%. The software giant sports a market capitalization of $1.2 trillion as of this writing and sits just below Apple as the largest publicly traded company.
Investors couldn't be blamed if they are worried that shares are priced for perfection and that any missteps could cause the stock to tumble in 2020.
But investors need not worry. There are many reasons 2020 could be another big year for Microsoft stock.
Cloud computing will be a huge 2020 driver
A big driver of Microsoft's momentum has been its cloud computing business. For the quarter ended Sept. 30, 2019, its commercial cloud business generated $11.6 billion in revenue, marking a 36% year-over-year increase. Azure drove the unit, with 59% revenue growth. Microsoft competes against Amazon Web Services and, while much smaller, is gaining at a faster clip. Azure saw 59% revenue growth in the third quarter compared to 35% growth for Amazon's cloud business.
According to market research firm Canalys, Amazon is the undisputed leader in cloud computing, controlling 33% of the market compared to 17% for Microsoft.
The gap between the two is expected to narrow in the years to come as Microsoft gets more customer wins under its belt. Some even think it will one day emerge as the cloud leader. Microsoft was just awarded a multiyear, $10 billion contract from the Pentagon, beating out Amazon, which had been the front-runner. Amazon filed a lawsuit disputing the contract award, claiming political bias on the part of the Trump administration. The government is an important client for both Amazon and Microsoft as they seek to grow their cloud businesses, as agencies are spending billions of dollars to migrate to the cloud and are more apt to work with technology providers that have existing relationships with the federal government.
Microsoft's opportunity in the cloud market is one of the reasons Bank of America analysts just slapped a $200 price target on the stock for 2020, meaning they think Microsoft can gain an additional 26% in 2020. The analysts predict Azure will account for more than 40% of Microsoft's growth in the years to come. Bank of America thinks Microsoft can easily grow revenue 10% annually in the coming years thanks to its cloud business.
It's not alone in its assessment. Stifel Nicolaus is modeling Azure to have revenue of $26.7 billion in fiscal 2021, jumping to more than $90 billion by 2030. Revenue from its Intelligent Cloud unit, which includes Azure, was $10.8 billion in the first quarter of fiscal 2020. Stifel Nicolaus predicts Microsoft's cloud revenue will be bigger than Microsoft Windows, Microsoft Office, and Windows Server combined in just three years. The firm thinks more huge Pentagon-type contracts are in the cards for Microsoft.
Products just in time for the 2020 holidays
Outside of cloud computing, Microsoft has a gaming business that could drive the top line higher. Just in time for the 2020 holiday season, Microsoft plans to launch its new Xbox Series X game console. It is banking on the new gaming system to boost sales, which have been slower due to the "end of life" of the current generation of game consoles. It also has new foldable Surface devices coming to the market ahead of the holiday selling season. If they resonate with consumers, it could lift Microsoft's sales and stock price.
Yet another reason investors may flock to the stock in 2020 is the stability its subscription business brings. Many corporate customers pay a monthly fee to access Microsoft software and cloud services. That gives Microsoft recurring revenue and gives investors predictability. If the trade war between the U.S. and China persists deep into 2020, investors will seek that stability. The same goes for a recession. Microsoft isn't immune to a recession, but it has a huge roster of big-business customers that won't be as impacted by a slowdown in the economy as consumers will. Companies may even pick up investments in the cloud during a recession to reduce expenses.
It's not clear how 2020 will play out, but with Microsoft just scratching the surface in the cloud market and new products coming out ahead of the 2020 holiday shopping season, investors have reason to be optimistic.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Donna Fuscaldo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, and Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.
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