Microsoft Corp. plans a “substantive” price increase on its commercial Microsoft 365 and Office 365 offerings for the first time, in what analysts see as a “long overdue” change that could benefit both revenue and profit.
The technology giant announced a series of commercial pricing changes Thursday, which will take effect beginning March 1. Though analysts expect it will take a couple years for the pricing moves to fully manifest in Microsoft’s
financials, analysts are upbeat about the company’s potential to elevate its contributions from a key product line, which offers packages of services like Word, Outlook, and Teams.
“In our view, these price increases will be a significant financial positive for [Microsoft] over time, particularly for what is one of the company’s most important product areas,” wrote Mizuho analyst Gregg Moskowitz, who predicts that investors will see the impact in fiscal 2023 and beyond.
The company offers a variety of commercial product suites, and Moskowitz noted that the lower-end ones will see larger price increases on a percentage basis than higher-end ones, “which hopefully will incentivize more migrations to higher-end” packages.
“Moreover, given a prolonged period of substantial innovation across these core product suites (tied to productivity/security), and the absence of any prior price increases, we would expect to see fairly minimal increases in dollar-based churn,” he continued.
Moskowitz reiterated his buy rating on Microsoft’s stock, while raising his price target $350 from $325.
Microsoft’s stock rallied toward a second-straight record close on Friday, and seventh record close in August.
Bernstein’s Mark Moerdler was also optimistic, writing that he expects the benefits from the changes “to roll-in over a period of one to three years, as the price increase generally takes effect on contract renewals.” The move could contribute low- to mid-single-digit revenue growth to the commercial Office 365 business and help profits “as most of the cost associated with Office 365 products is already built into the current operating model,” he added.
Moerdler called the price hikes “long overdue” and said that they signaled growing confidence among Microsoft executives “that they have built a defensible moat around the Office franchise.” He sees room for another potential price increase down the line, but not for “many years and once the company has added meaningful additional functionality.”
Microsoft isn’t raising the prices of Office 365 consumer or education packages, and Moerdler doubts that the company will raise consumer prices “given the long runway ahead for converting paid users to Office 365 consumer as well as decreasing piracy.”
UBS analyst Karl Keirstead saw the price increase “primarily as a Teams monetization move” and “one that may not necessarily be a positive for Teams rivals Zoom, RingCentral or Salesforce/Slack.” He also calculated that the blended price increase, across the various product suites, amounted to about 14% to 15%.
Keirstead lifted price stock price target to $350 from $325, and kept his buy rating.
Microsoft shares were up 3% in Friday trading. They have gained 23.8% over the past three months as the Dow Jones Industrial Average
has risen 2.9%.