- Microsoft’s shares may still have room to rally further.
- Analysts are bullish on the company and expect it to retain its growth momentum.
- Also, the stock is reasonably priced compared to industry average indicating there may be ample room for stock price appreciation from the current levels.
Microsoft’s (MSFT) shares are up by about 40% over the last year and market commenters are growing skeptical about the longevity of this rally. But investors with a long-term time horizon shouldn’t fret just yet. The company’s transition to a recurring revenue business model continues, its unearned and recognized revenues continue to grow, analysts are bullish on its future prospects and the stock is still modestly priced when compared to some of the other high-flying software firms. These factors, in my opinion, can potentially drive Microsoft’s shares to new highs going forward. Let’s take a closer look.
Strengthening Financials
I’d like to start by saying that Nadella’s business transformation efforts continue to bear fruit for Microsoft and its shareholders. The software giant began transitioning away from its traditional software licensing model, to a cloud-based recurring revenue model around 2015 and its sales have been continuously growing ever since. Our database at Business Quant reveals that Microsoft’s services with a recurring revenue model thrived during its Q1 FY21.
(Source: BusinessQuant.com)
Unfortunately, Microsoft doesn’t reveal sales figures for most of the aforementioned services so, we can’t decisively decipher how far along the software giant is in its journey to transition to a recurring revenue model. I encourage readers to have a discussion about this aspect of the Windows-maker’s business in the comments section below this article.
But what we do know is that Microsoft’s unearned revenue, which is partly a byproduct of its transition to a recurring revenue model, has continued to grow over the recent years and is now hovering near record highs.
