Microsoft Corporation (NASDAQ:MSFT) stock was little changed on Tuesday despite a price target increase from one analyst who cited the strength of the Microsoft cloud business. The company also said in a post today that it had to halt security updates to patch the Meltdown and Spectre vulnerabilities for devices running on AMD chips after reports that the patches were pushing some of the machines into an “unbootable state.”
Praise for Microsoft cloud business
In a note on Tuesday, Oppenheimer analyst Timothy Horan said he boosted his price target for Microsoft stock from $100 to $115 per share, citing strong checks in the cloud channel. He noted that the cloud is about one-third of the company’s revenues and is growing at a rate of about 38% year over year. He expects the cloud business to drive a 9% increase in consolidated revenue and 12% increase in EBITDA over the next few years.
He explained that the Microsoft cloud business is “attractive” because it improves “customer lock-in” and is driven by faster innovation. He also said that the Microsoft cloud business offers more potential to up-sell customers and carries lower operating costs than the rest of the company. Further, the Microsoft cloud business is cannibalizing other industries and thus driving growth in overall IT spending, which also boosts the company’s legacy IT products.
Horan estimates the Microsoft cloud business, which includes Azure, Office 365, LinkedIn, Dynamics and Search, at $35 billion. He estimates cloud revenues growing at about $10 billion annually with EBITDA of $5 billion to $6 billion. His estimates exclude gaming, which will also be moving to the Microsoft cloud business.
Tax reform should also benefit Microsoft stock
In addition to the cloud business, he also named other positives for Microsoft stock. For example, the company is expected to benefit from tax reform, along with most other tech majors holding large piles of cash overseas.
Horan estimates that the company has about $130 billion in cash held outside the U.S., and he believes it will split any cash it repatriates between shareholders and acquisitions. He estimates Microsoft stock buybacks to reach $18 billion in fiscal 2018 and $25 billion in fiscal 2019. He also boosted his dividend estimates for the company, adding that a special dividend could be declared for Microsoft stock holders.
Microsoft patches Meltdown and Spectre
Microsoft stock has climbed since the Meltdown and Spectre vulnerabilities were initially revealed last week.
The company confirmed on Tuesday that the security updates to patch those vulnerabilities are slowing down certain PCs and servers, with systems running on older Intel processors being affected the most. Microsoft also revealed today that the security updates placed some PCs running on AMD processors in an “unbootable state.” The company is now working with AMD to fix the issues, which the chip maker said seem to be affecting some of its older-generation processors.
AMD stock slipped on Tuesday following Microsoft’s post. The chip maker’s shares had skyrocketed in the days following the first report about Meltdown and Spectre due to claims that there was a nearly zero chance that its chips were vulnerable. Microsoft stock closed down 0.068% at $88.22 on Tuesday.
