Successful Cloud Transition Earns Microsoft Stock A Major Upgrade

Microsoft (NASDAQ:MSFT) bear Heather Bellini of Goldman Sachs has finally done a mea culpa and upgraded Microsoft stock to Neutral after staying on the sidelines and keeping the stock at Sell even as Microsoft stock went on a three-year rally. Miss Bellini has remained an adamant Microsoft bear even as the stock more than doubled over the past 3 years.

Microsoft Stock 3-Year Returns

Source: CNN Money

Bellini has changed her stance on Microsoft stock and hiked her stock target by $12 to $57 saying:

“We were wrong, we are increasing our out year non-GAAP EPS estimates, driven primarily by faster gross margin expansion in Office 365 and Azure. While we still believe EPS consensus for FY17 and FY18 are too high, given the ongoing successful transition to the cloud we do not see the multiple coming under pressure.”

Bellini added that she sees several possible catalysts in 2016 that could continue pushing Microsoft stock higher including a successful cloud transition, EPS growth, gross profit dollar growth despite contracting margins, accelerating dividend growth, and diminishing headwinds related to Office 365 transition and weak PC sales.

Microsoft certainly seems to have a lot going for it. While all the catalysts that Bellini mentioned can play a part in helping Microsoft stock continue making good gains in 2016, I believe that a successful cloud transition is the biggest pillar upon which the stock trades.

Microsoft’s Cloud Growth: Short-term pain, long-term gain

Microsoft is not the only old-line software company that is attempting to transition from an on-premise software model to a cloud subscription model. Oracle (NYSE:ORCL) is facing pretty much the same situation as Microsoft as it tries to wean its enterprise customer from on-premise software. Looking at the earnings report by the two companies, one thing jumps at you: overall revenue has been on a decline even as their cloud revenues keeps growing.