Morgan Stanley Is Bullish on Microsoft Because IT Departments Love It
Microsoft has a key ally in its fight for business as companies move more software to the cloud: the people who run corporate information-technology departments.
In a Thursday note, Morgan Stanley analyst Keith Weiss reiterated his confidence in Microsoft’s (ticker: MSFT) future, based on the bank’s latest survey of companies’ IT heads. Although uncertainty about the economy has weighed on companies’ 2020 budgets for technology, according to the survey, Microsoft remains well positioned.
About 36% of the executives surveyed said that they prefer Microsoft for the management of their hybrid cloud environments. That puts the company ahead of the runner-up— Amazon.com’s (AMZN) Amazon Web Services—by 9 percentage points.
A hybrid cloud system is one that combines software run on a company’s premises with whatever it operates in the cloud, whether via a firm’s own gear, or through a third party. Cloud management is the process of controlling all of that.
Microsoft’s machine-learning and artificial-intelligence business has also been growing head-to-head with Amazon over the past three years, taking market share from the previous leader, IBM’s (IBM) Watson, according to Weiss.
At the same time, Microsoft has been able to maintain its leadership in the productivity-software market via the dominant Microsoft Office suite. Many of its clients are planning to migrate to the cloud version—Office 365—over the next few years, he said.
Even for workplace collaboration systems, about 40% of the surveyed executives said they are currently using Microsoft Team as their standard tool, much higher than the 7% for Slack Technologies (WORK) and 6% for Alphabet’s (GOOGL) Google Hangout Chat. All three tools are expected to see strong growth over the next three years.
“Amidst an increasingly unsettled IT spending environment, these data points bolster our confidence in the durability of Microsoft’s commercial business and the potential for further leverage in the model,” wrote Weiss. He believes Microsoft will be able to win a bigger share of enterprises’ tech budget and deliver durable double-digit revenue growth, as more companies shift their digital operations to the cloud.
Microsoft shares have rallied 37% this year—largely driven by investor optimism about the company’s Azure cloud business—and trade at $140 per share as of Thursday’s close, just slightly below their record high, reached in July. The software giant will report its September quarter earnings next week and Wall Street is upbeat, estimating earnings will jump by 11% from the year-ago period to reach $1.24 per share.
Weiss reiterated his Overweight rating for the stock with a $155 price target, saying Microsoft is his top pick in the software industry. He expects the Azure cloud business will grow by 63% in the September quarter as compared with last year, and that the company’s total earnings be in line with the Wall Street consensus.