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Why Is Microsoft (MSFT) Stock Surging Today?

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Shares of Microsoft (MSFT - Free Report) surged nearly 6% in early morning trading Monday after analysts from Morgan Stanley said that the software giant is on track to reach $1 trillion in market capitalization within the next year on the back of continued cloud adoption.

“Strong positioning for ramping public cloud adoption, large distribution channels and installed customer base, and improving margins support a path to $50 billion in EBIT and a $1 trillion market cap for MSFT,” wrote Morgan Stanley’s Keith Weiss in a note to clients Monday.

The analyst also raised his price target for Microsoft to $130 from $110, which represents a 50% upside to Friday’s close. If the stock were to reach that $130 per share target, the software behemoth would be worth around $1 trillion. Microsoft currently sits behind Apple (AAPL - Free Report) , Amazon (AMZN - Free Report) , and Alphabet (GOOGL - Free Report) on the race to $1 trillion.

The key to the Redmond, Washington-based company reaching this milestone will be growth in the public cloud, Morgan Stanley said. Through products like the Azure platform, Microsoft is a global leader in the public cloud market, which Morgan Stanley thinks will double in size to more than $250 billion.

The research firm also argued that Microsoft’s existing assets should help it gain an even larger share of this market over the next three years, citing advantages such Microsoft analytics, machine learning, front office apps, and core financials as ways that the company stands out from rivals like Amazon and Google.

Morgan Stanley’s note is part of a larger trend of improving analyst sentiment for Microsoft. Within the past 60 days, we have seen 14 positive revisions to the company’s full-year earnings estimates, lifting the Zacks Consensus Estimate by 25 cents within that timeframe.

Analysts are now expecting Microsoft to report adjusted earnings of $3.65 per share for the current fiscal year, which ends in June. That result would represent year-over-year growth of nearly 10.3%. What’s more, this bottom-line growth is actually projected to be outpaced by revenue growth of 13%.

Meanwhile, Microsoft shares are currently trading at about 23x forward 12-month earnings. This valuation might seem somewhat stretched, but it is actually a slight discount to the average Forward P/E of our “Computer – Software” industry, which currently sits at about 25. The stock has traded as high as 28x within the past year.

Still, Microsoft investors will hope that the company can keep its valuation in check by continuing to expand its bottom line while on the race to $1 trillion.

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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