Analyst Keith Weiss lifted his target on the Redmond, Wash., company to $189 a share from $157, affirming an overweight rating.
The new price target represents 20% potential upside from the stock’s Tuesday closing price at $157.58.
The target represents a multiple of 28 times forward earnings, which is a “premium to the broader market, supported by a premium total return profile,” Weiss said.
Weiss said that product cycles and the cloud-services-revenue mix have turned some investors cautious about the durability of the company’s fiscal 2021 gross margins.
But Weiss also says Morgan Stanley’s “bottom-up gross-margin analysis supports an out-of-consensus view of expanding margins.”
The firm estimates that gross margins will fatten by 0.1 percentage point in fiscal 2021 over fiscal 2020, while the consensus estimate sees a narrowing of 0.6 percentage point.
Morgan Stanley identified five margin catalysts for Microsoft, including:
- A global Azure cloud platform that supports a growing set of customer applications.
- Hybrid cloud capabilities that allow smooth transitions to the cloud.
- Broader capabilities to build new applications through a revitalized development-and-operations platform
- A collaborative productivity suite that expands the base of end-user access to new application capabilities
- More robust security and management solutions, ensuring the security of these new initiatives.
“Microsoft remains the best positioned name in tech for the emerging hybrid cloud architecture ... with improving margins sustaining a durable teens total-return profile,” Weiss wrote.
Microsoft shares at last check were 0.9% higher at $159.01.