Microsoft (NASDAQ: MSFT) shares have been up 100% in the last eighteen months because of its industry-leading position, technology, and growth outlook. The question on the minds of many investors is how much higher Microsoft’s stock price can go, which is considerable. Factors including the technical picture, the analysts, and the valuation suggest this stock could push the rally to over 200% within the next eighteen months. Here’s why.
Microsoft is in a Secular Uptrend With Legs
Microsoft’s stock hasn’t just been trending higher for the last eighteen months but for the last twelve years. The uptrend began with the company’s shift toward the cloud and SaaS and the crowning of Satya Nadella as king of the MSFT empire. Since then, the stock price has advanced nearly 1300% and is on track to extend the gains. The recent action includes a peak in 2022, followed by a 30% correction. The 30% correction was a healthy consolidation within the market, leading to the current rally, and this bounce is strong.
The monthly and weekly charts are set up for a robust trend-following signal. The monthly chart shows a strong rally from the $240 level with a Bullish Flag Continuation Pattern leading to a new all-time high. The MACD indicator converges with the new highs, showing market strength and suggesting the current highs will be exceeded. The technical projections begin with the 2021-2024 trading range, which is $110 in magnitude. Projecting $110 to the break-out point of $350 gives a target of $460, which the market is fast approaching. A move above the $460 level is likely; the market will rise by another $110 to $570 in that Bull Case Scenario.
Analysts Are Leading Microsoft Stock to New Highs
Microsoft’s industry strength is a given due to its leading position in the cloud and now with AI. The latest earnings report included near-20% top-line growth, growth accelerating compared to last year, and a positive outlook supported by demand for Azure at levels. The takeaway is that analysts like what they see and are leading this market higher. However, the Moderate Buy rating and 5% upside at consensus aren’t impressive until you look at the trends.
The trends in sentiment have the MarketBeat.com rating edging higher and on the verge of a Strong Buy while the price target trends higher. The consensus target assumes only a 5% upside but is up 40% in the last year and rising following the Q1 results. The post-release activity includes more than a dozen updates, including several targets reiterated above consensus and more boosted targets to the high end of the analysts' range. A cluster of new targets puts this market in the $550 to $600 range, aligning with the technical Bull Case Scenario.
Microsoft Commands a Premium Valuation: Earnings Leads it Higher
Microsoft commands a premium valuation compared to the broad market trading at 37X this year’s earnings outlook and 33X next year’s. However, the company’s valuation has increased since 2012/2014, when the cloud/Nadella shift was in its earliest phases and is well-deserved.
The factors influencing price action today are the growth outlook and the earnings quality. The company is expected to sustain a solid high-teen growth pace for the next three to five years, putting the valuation in a more reasonable range within three years. The consensus for June 2027 is $18.64, a nice, low, forward P/E of only 24X for this blue-chip dividend payer. Assuming the company sustains its premium valuation, it could rise by five to six handles on price-multiple expansion. $18.64 at a 30X valuation puts the market at $560, aligning with the Bull Case forecast.
The dividend isn’t large, but it is sustainable and growing. The stock yields about 0.65% with shares near $445 and is only 25% of the earnings. Cash flow is solid and supports a fortress balance sheet. The company has increased the dividend for twenty consecutive years and is on track for inclusion in the Dividend Aristocrats before the decade's end. That is another tailwind for this market that will help to drive this tech stock share price higher over time.
