Goldman Sachs upgrades Microsoft on basis of strong cloud services

Analysts at Goldman Sachs have encouraged investors to buy Microsoft on the strength of its cloud software business, which the investment bank says will boost its earnings in years to come.

Goldman previously had Microsoft at "Neutral", but has now upgraded that to "Buy", as it believes it will outperform estimates in the near future.

Analyst Heather Bellini raised her stock price target to $68, which is 13% above current levels, from $60.

"We believe the shares are poised to more consistently outperform in the year ahead on the back of sustained traction in its Cloud offerings (Azure and Office 365) overlaid by steady albeit not spectacular performance out of its legacy PC-linked software business," Bellini said.

Cloud computing is one of the most competitive areas of technology at the moment as various tech firms vie for a lead in the area, including Amazon who have recently made a strong push to improve its offering.

"Our upgrade is based on 1) accelerating growth in gross profit dollars driven by its cloud transition, 2) an inflection in incremental operating margins as cloud profitability ramps and operating expense growth remains muted, and 3) upside potential to consensus out year EPS forecasts," added the analyst.