Satya Nadella is the Chief Executive Officer of Microsoft Corporation. He gestures during his address at Future Decoded Tech Summit, Bangalore, February 25, 2020. (Photo taken by Manjunath Niran / AFP). (Photo taken by MANJUNATH KIRAN/AFP via Getty Images).
Microsoft shares closed Monday at a new record high, as analysts began to recognize the financial consequences of Microsoft's decision to raise the price of Office 365 productivity software subscriptions next year for businesses.
The company's market capitalization of almost $2.3 trillion was achieved with shares closing at $304.65 on the day. Microsoft shares have risen 37% over the past year, surpassing many of its larger tech competitors. Google-parent Alphabet, however, has seen gains of almost 60% for the year.
Although analysts haven't been quick in updating their estimates, many believe the price increase has the potential to boost revenue and profit for a foundational portion of the company. The costs of providing Office 365 services are already included in Microsoft's operations.
A Sunday note by Kash Rangan, a Goldman Sachs analyst, stated that Office 365 commercial subscriptions accounted for 18% of Microsoft’s revenue during the fiscal year ending June 30, 2013.
The group stated that the announcement "reveals the company's strong competitive position and long-term price power, helping to drive continued ARPU growth through the CY22 as also help drive continued SKU migration towards E3 and E5," they wrote.
One type of subscription, Office 365 E5, will increase in price by 9% per month, starting March 1, 2022. The more affordable Office 365 E1 will rise by 25%.
Rangan and his coworkers wrote that price increases could be used to encourage further migration to premium E3 or E5 SKUs. The percentage increases for premium tiers are lower, which, in our opinion, increases the relative value proposition premium SKUs."
After Microsoft's announcement, analysts at UBS and Mizuho raised their price targets for Microsoft stock to $350 instead of $325.
Cowen analysts J. Derrick Wood and others wrote that they expect more clarity about the price hikes on the company’s 1Q22 earnings call (late Oct)" in a Thursday note.
It won't be limited to the Office line. Microsoft 365 E3 will see a 13% increase in the price of Microsoft 365 E3, which includes Windows, Enterprise Mobility and Security features. Analysts at UBS wrote that more revenue from this subscription will mean more money for highly profitable Windows businesses and the per-user segment of the rapidly-growing Azure cloud business.
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