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Microsoft is the stock you "have to own," trader says

Key Points
  • Microsoft is already up 36% this year and trading right around its all-time high. Betting on more upside, especially in the cloud business, Cowen initiated coverage on Thursday at an outperform rating.
  • In addition to cloud growth, subscription revenue, Windows and LinkedIn are reasons to stay bullish, according to Pete and Jon Najarian.
  • In the cloud space, "if [Microsoft] can claw some of that market share back [from Amazon], then absolutely, I think this stock can go higher," says Pete Najarian.
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Microsoft initiated outperform at Cowen

Microsoft, the US' most valuable public company, is already up 36% this year and hovering around its all-time high. But Cowen sees even more upside.

The firm initiated coverage of Microsoft on Thursday with an outperform rating and $150 price target. Predicting that the company can deliver an incremental $100 billion of revenue by fiscal year 2025, Cowen believes Commercial Cloud, which includes Azure and Office 365 Commercial, will become the primary driver of growth.

Traders agree with Cowen's positive sentiment on Microsoft, which hit a new all-time intraday high of $139.22 on Thursday.

While Cowen's note focuses on Microsoft's growing cloud capabilities, Pete Najarian, cofounder of Investitute.com, has other reasons to be bullish. "Cloud growth is part of it, and the subscription model as well," he said on Thursday's "Halftime Report." "By the way, we all want to say Windows is dead. Windows is not dead. That continues to grow as well."

"It's all about LinkedIn for my mind and for my money from here, rather than just focusing completely on the cloud," added Jon Najarian, cofounder of Najarian Family Office. LinkedIn, which Microsoft purchased for $27 billion in 2016, has more than 610 million users and is responsible for more than 5% of the company's revenue.

CEO Satya Nadella, who took over in 2014, deserves a lot of the credit for Microsoft's success in recent years. Pete Najarian echoed widespread sentiment when he said that from the beginning, Nadella "had an absolute plan in place. That plan was to transition the company to where it is now" — a competitor in cloud and software whose market capitalization is over $1 trillion.

The traders do have some concerns, though.

Pete Najarian thinks the stock is "getting a little loftier in terms of the P/E." Microsoft's forward P/E is 30 times earnings right now, and a high P/E can signal that the stock is getting ahead of itself. Najarian still owns its stock and call options, but is keeping an eye on the rising valuation.

In particular, despite Cowen's bullish outlook on Microsoft's potential in the cloud infrastructure space, Najarian says you can't forget about Amazon, which remains the clear leader. Last quarter, Microsoft's share of the market jumped to 13% from 10%, but Amazon remained at 33%. Najarian cautioned, "Microsoft is a deep distant second. But if they can claw some of that market share back, then absolutely, I think this stock can go higher."

Stephen Weiss of Short Hills Capital Partners has a shorter term concern: Microsoft reports fiscal fourth quarter earnings next Thursday. "The company's going to continue to do well, but they've got to perform. If they don't perform, there's no safety net here," he warned. The street is expecting Microsoft to be one of the few names that does well in an earnings season generally projected to be weak — according to estimates from FactSet, analysts are projecting that the company will report EPS of $1.21 and $32.75 billion in revenue.

Bottom line? As Joe Terranova of Virtus Investment Partners said, "That stock is something you have to own."

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Final trades: ONEOK, Enterprise Products, Micron & Biotech

Disclosure: Jon Najarian, Pete Najarian, Joe Terranova and Stephen Weiss own shares of Microsoft. Jon and Pete Najarian also own calls in Microsoft.