Microsoft stock hits a new record after announcing Office 365 price hikes

August 25, 2021: -On Monday, Microsoft shares closed at a new record, as more analysts recognized the financial implications of the software and hardware maker’s decision to raise the price of certain Office 365 productivity software subscriptions for businesses in the coming year.

Shares ended at $304.65 for the day, which gives a market cap of nearly $2.3 trillion. Microsoft shares are up almost 37% for this year, outpacing most of its large-tech rivals. Google-parent Alphabet has notched gains of almost 60% year to date.

Analysts haven’t been quick to update their estimates. Still, many said the price change could boost revenue for a foundational part of the company and profit that the costs of providing Office 365 services to customers are already factored into operations of Microsoft.

Commercial subscriptions to Office 365 represented nearly 18% of Microsoft’s revenue in this financial year that ended on June 30. A Goldman Sachs team led by analyst Kash Rangan writes in a note on Sunday.

“We believe the recent announcement highlights the strong competitive positioning and long-term pricing power of the company, that help drive continued ARPU growth through CY22 and helped drive continued SKU migration to E3 and E5,” the group wrote.

The price for one type of subscription, the premium Office 365 E5, is growing by 9% for each user per month beginning from March 1, 2022, while the cost of the affordable Office 365 E1 will go up by 25%.

“in our view, price increases could be aiming at driving more migration up to premium E3 and E5 SKUs as the percentage growth are lower for more premium tiers, surging the relative value proposition of premium SKUs,” Rangan and his colleagues wrote.

Mizuho and UBS analysts upped their price targets on Microsoft stock to $350 from $325 after the announcement of Microsoft.

“We anticipate more clarity on the price increases on the 1Q22 earnings call of the company,” Cowen analysts led by J. Derrick Wood wrote in a Thursday note.

The impact won’t just hit the Office line. The cost of Microsoft 365 E3, whose price will go up 13%, including Windows and Enterprise Mobility and Security features. The UBS analysts wrote that more revenue coming from that subscription means more money for the highly profitable Windows business, along with the per-user portion of the fast-growing Azure cloud business.