With a market capitalization of more than $500 billion, Microsoft Corporation (Nasdaq: MSFT) is one of the largest technology companies in the world. But despite its massive size, Canaccord Genuity analyst Richard Davis says Microsoft’s revenue growth may soon start to accelerate once again.
On Thursday, Davis upgraded Microsoft stock to “buy” and said Microsoft has several unique long-term growth drivers in Microsoft Office Productivity, PC and console gaming, marketing and cloud computing.
[See: The 10 Best Ways to Buy Tech Stocks.]
“In our experience, accelerating growth should at least preserve MSFT’s current valuation and perhaps even drive a bit of [earnings] multiple expansion, which will continue to drive the stock higher,” Davis says.
Most Microsoft investors are well aware of the growth potential of the Microsoft Office 365 upgrade cycle and the company’s rapidly-expanding Azure cloud services segment. Davis says investors are overlooking the massive growth potential of esports, a market which is still in its infancy.
For now, Microsoft’s total revenue is a mix of marginally declining revenue from its legacy business segments and double-digit growth from its top-performing segments.
“As the faster growth segments increase as a percentage of the total, aggregate revenue growth should accelerate, which is generally a driver of multiple expansion,” Davis says.
Canaccord expects Microsoft’s revenue growth to increase from just 6 percent in fiscal 2017 to 12 percent annually by fiscal 2022. Davis says large-cap stocks that catch investors by surprise by delivering an uptick in revenue growth rates typically perform very well in the long-term.
[Read: Stock Market Showdown: IBM, Microsoft Storm the Cloud.]
Even after a 31 percent gain in the past year, Microsoft shares still trade at a reasonable forward price-earnings ratio of 20.8.
In addition to the upgrade, Canaccord has set an $86 price target for Microsoft stock. If the company hits Canaccord’s growth targets, Davis says the stock could climb as high as $120 by the end of 2020.
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Microsoft Corporation (MSFT) Revenue Growth Could Double originally appeared on usnews.com
