When Microsoft and LinkedIn announced that they would be merging, analysts quickly downgraded Microsoft stock and/ or slashed their price targets for the company. Most said it was a bad move on the company’s part, but now a few are changing their tune.
Microsoft stock target to $72
Morgan Stanley analyst Keith Weiss boosted his price target for Microsoft stock from $64 to $72 per share and reiterated his Overweight rating. He now feels that LinkedIn is providing some momentum, while Microsoft is continuing its earnings growth story. As a result, he sees the social network as enhancing the cloud and software giant’s already-strong foundation to boost its earnings per share growth into the double digits.
Weiss said in a research note dated Dec. 22 that he expects the combination of Microsoft’s distribution channels with LinkedIn’s products should boost monetization of the social network’s user bases, in addition to engagement. He also believes the combination offers upselling opportunities for Microsoft’s Office 365 and Dynamics 365 products. Looking further out, he sees even more “strategic value” being created by the acquisition and the merging of the company’s products and services.
After including LinkedIn into his estimates, the analyst sees 2% earnings per share accretion in fiscal 2019 with just 10% of the revenue synergies he expects.
Microsoft stock coverage initiated at Overweight
Like Weiss, Piper Jaffray analyst Alex Zukin is also bullish on Microsoft stock. He has an even higher price target of $80 per share and an Overweight rating on it. He called the cloud and software company “a mega cap growth story that is in the driver’s seat of a generational shift to Cloud Computing.” He feels that the company has already successfully transitioned into relevancy in cloud computing, but he also expects the continuing shift through hidden demand for Azure, Office 365 and possibly Dynamics 365 to accelerate the company’s revenue growth.
Unlike Weiss, Zukin chose to focus on Microsoft’s cloud story rather than the LinkedIn acquisition as the main part of the company’s story. He said the main part of his thesis is cloud services, although he does see some contribution from the social network. While the cloud is the core of his thesis, he focuses on Azure, Office 365 and LinkedIn.
Microsoft a “hyper-growth story”
Zukin believes there is pent-up demand for Azure and that this will drive a “hyper-growth story” for Microsoft through Fiscal 2019 while also accelerating gross margins. He sees the negative gross margins for the segment as being caused by investments in data centers, which of course should drop off as the service matures.
In terms of Office 365, he sees a “‘conversion’ story unfolding.” At its peak, the legacy Office software was estimated to have about 1.2 billion users, but already, the Office 365 user base is estimated at about 98 million. Zukin expects the Office 365 user base to grow by about 26% through fiscal 2019.
The analyst expects LinkedIn to bring not only the $5.7 billion in fiscal 2019 revenues but also an additional $1.8 billion in revenue synergies.
Shares of Microsoft stock were unaffected by Morgan Stanley’s price target increase, as they slumped by as much as 0.06% to $63.50 during regular trading hours on Thursday.
