PhillipCapital analyst Timothy Ang has given Microsoft a buy rating and target price of US$405 ($554.35) as he thinks that rising demand for cloud solutions and cybersecurity solutions will be beneficial for the company.
In a Dec 13 report, Ang says that Microsoft’s cloud business, Azure, has doubled its market share, leveraging on the installed base of 72% of global enterprise servers with attractive pricing.
Azure has doubled its market share from 10% to 20% between 2017 and 2021, and is expected to expand further as enterprises choose Azure as their primary cloud vendor due to existing relationships with Microsoft.
72% of servers worldwide and 83% of global personal computers are licensed with the Windows operating system. This is combined with its attractive pricing, where Azure can be 5x cheaper for existing on-premise Windows or SQL Server license customers looking to shift to the cloud than for competitor Amazon Web Services (AWS).
“Customers also choose Azure over concerns about competition from AWS and Google, whose businesses are built on selling ads and products,” Ang writes.
Furthermore, he notes that Azure is Microsoft’s fastest-growing segment at 66% CAGR in the past five years, and he expects it to continue strong revenue growth of 41% in FY2022.
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On the cybersecurity front, Ang says that demand is also rising for premium licenses. MSFT’s highest-end E5 license user base as a percentage of MSFT’s total commercial Office 365 user base rose from 5% to 8% in FY21.
He observes that customers are upgrading for better security after major cyberattacks in 2021, and Microsoft’s scale as the largest global cybersecurity company with over 3,500 cybersecurity staff is seen as capable of managing larger contracts and being able to better respond to cyberattacks.
An executive order also drove federal institutions to upgrade cybersecurity postures. License upgrades helped drive average revenue per user (ARPU) up 7% and operating margins to a 19-year high of 42% in FY2021.
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Ang expects license upgrades to drive commercial cloud revenues up 30% in FY22, sustaining operating margins above 40%.
Cybersecurity demand is also accelerating upgrades to Microsoft’s higher-end licenses, helping sustain historically high operating margins above 40%.
As for its core productivity software, paid Office 365 Commercial seats are still growing in double digits, at 17% y-o-y to 300 million seats in FY2021. This is despite the high penetration of 89% share in the productivity software market.
The continued economic recovery is driving demand from small and medium businesses, and future growth will also be driven by price increases of up to 25% kicking in on 1 March 2022 for the commercial 365 products.
Ang elaborates that price increases are relatively higher for lower-end licenses, which could incentivise new customers to purchase higher-end licenses.
“We expect the Productivity and Business Processes segment revenue to grow 17% in FY2022, higher than the five-year average of 16%.”
He does highlight some risks to the company, including stiffer competition from AWS and Google, as well as the global chip shortage constraining sales of its Surface tablets and Xbox gaming consoles.
Shares of Microsoft closed at US$328.04 on Dec 14, with a FY2022 price to earnings ratio of 37.2 and dividend yield of 0.6%.
