Shares of Microsoft Corp. (MSFT, Financial), a technology company, have risen over 11% year to date, pushing the companys market cap to $861.59 billion. The companys strength and focus on cloud computing and enterprises has many investors speculating whether or not the company can hit the $1 trillion mark this year.
Commercial cloud computing is going to be a major driver of the companys success this year. Cloud computing is expected to grow into a $400 billion industry by 2020, and Microsoft CEO Satya Nadella announced the companys shift to the cloud in 2014.
The companys intelligent cloud segment grew by 20% in fiscal Q2 2019. Microsoft Azures segment, which allows for custom software development and deployment, grew at a rate of 76%. Commercial cloud revenue grew by 48% to hit $9 billion.
Amazon (AMZN, Financial) is a strong competitor in cloud computing, but the company has primarily catered to smaller business owners, although it does help run some of the biggest sites in the world. Microsoft has chosen to focus on enterprise for its cloud computing segment.
Office and SQL remain an important enterprise solution for the company, and since the personal computing segment is slower growing than enterprise, it was the right move for Nadella to make.
Strong double-digit growth in the cloud market is expected, and a rise in enterprise growth may help the company reach the $1 trillion market cap threshold. Cloud growth will be the driving factor for the company moving forward.
Microsoft has a long way to go this year to reach the $1 trillion mark, and there are a lot of factors at play. Global economies and politics can influence a market where Microsoft needs to increase its shares by 16% or more to potentially hit the $1 trillion mark.
Its price-earnings ratio would need to rise drastically to 26, which may be outside of the companys earnings growth potential.
Growth rates in the companys cloud segment, while still very high by most standards, are starting to slow slightly. The year-over-year growth in second-quarter 2018 was 56%, while second-quarter 2019 year-over-year growth hit 48%. Projections do not have the growth of the cloud segment reaching the 50% mark in any of the coming quarters, and in the first quarter of fiscal 2019, growth was 47% year-over-year in the cloud business.
In the end, Microsoft will come close to hitting the $1 trillion market cap, but as an investor, the focus should be on long-term value. Microsoft remains a great long-term stock.
DIscosure: The author does not have any stakes in the listed equities.