Microsoft's Path To A $1 Trillion Market Cap

Microsoft’s stock recently hit an all-time high, and its market capitalization reached over $700 billion. Some analysts on Wall Street have recently predicted that the company’s market cap could reach $1 trillion in the coming years, on the back of the increasing popularity of its cloud services across the Productivity and Intelligent Cloud businesses. We have created an interactive dashboardwhich illustrates the growth and margin improvements across the company’s divisions that would need to occur in order to reach this valuation. You can modify assumptions such as projected revenue and margins to see how the valuation changes.


MSFT Scenario

MSFT Scenario

We currently have an $87 price estimate for Microsoft, which is in line with the current market price.

Productivity And Business Processes Business To Power Valuation

Microsoft’s Productivity and Business Processes revenues, which include the Office suite, Dynamic CRM and ERP and LinkedIn, has grown from $27 billion in 2014 to $30.5 billion in fiscal 2017, primarily due to the growth in Office 365 cloud services and Dynamics cloud software. Currently, we project those revenues to improve to $45 billion by the end of our forecast period as the company continues to strengthen its presence in the rapidly growing productivity market through sales of cloud-based Office 365. However, as Office 365 and Dynamic cloud are witnessing robust adoption, it is possible that that the actual performance will exceed our forecasts. While Office 365 commercial seats grew by 40% from 85 million in 2016 to 120 million active users in 2017, Dynamics software revenue grew by 8.3% in first three quarters of 2017. Considering this growth across these two verticals, it is possible that revenues from this segment could grow to $60 billion by 2024 if this rate of growth is maintained.

Furthermore, operating margins in 2017 declined to historic lows as the company completed the acquisition of LinkedIn, which negatively impacted margins due to an acquisition-related operating loss of $361. While we expect margins to improve to 42.5% by the end of our forecast period as the company is increasingly selling more cloud subscriptions compared to perpetual licenses, the margins could improve even more – to above 52% – as hosted solutions are generally higher-margin in nature than the traditional suite. An increasingly favorable sales mix could boost margins even more than we forecast. Cumulatively, the superior growth in revenues and margins will result in an upside of $186 billion, or $24 per share, to our existing valuation.

Brittany LeMaro