Microsoft Corporation (MSFT): An Expansive Path to FBR's $49 Target

Microsoft Corporation (NASDAQ:MSFT) shares are getting a helping hand from an upgrade today. Shares of the software giant are up more than 1.5% as we type thanks to a strong market and an upgrade from FBR Capital.

Analyst, Daniel H. Ives raised his recommendation to an "Outperform" from "Market Perform" rating. The analyst pinpoints a price-target of $49 with his updated outlook.

In case you don't know, Microsoft is engaged in developing, licensing and supporting a range of software products and services. The Company operates in five segments: Windows & Windows Live Division (Windows Division), Server and Tools, Online Services Division (OSD), Microsoft Business Division (MBD), and Entertainment and Devices Division (EDD).

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Ives tells interested investors, "While the company has clearly missed opportunities to become a major player in the tablet, mobile, and search markets over the years, we believe now with Nadella at the helm, Microsoft is off to a golden start with his improved transparency and strategic focus on the mobile/cloud space. Coupled with a number of key strategic announcements Nadella has made as new CEO (Office on iPad, free Windows on certain mobile devices, Surface Pro 3, partnership with salesforce.com), we also believe Microsoft's disciplined spending leaves it poised for long-awaited growth in free cash flow (we estimate 5% year-over-year growth for FY15), representing a breath of fresh air for investors, in our view."

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He continued, "That said, given our checks from the field and recent results (March quarter), we believe Microsoft is experiencing accelerated traction in the cloud with its core cloud Office product (e.g., Office 365) showing good subscriber momentum, while its cloud services platform (e.g., Azure) is also growing rapidly on the heels of strong secular trends (e.g., cloud buildout). In a nutshell, while its mobile strategy (e.g., Surface, Nokia) remains a "prove me" situation, we believe Microsoft's intertwined focus with the cloud will help breathe new life into this software behemoth over the coming years."

Let's take a look at MSFT's recent price-to-sales (P/S) and price-to-earnings (P/E) ratios, and Wall Street's current consensus earnings and sales estimates to see what it will take to find FBR's $49.

For 2015, the street's top-line outlook for MSFT is $100.56 billion with $2.87 per share making it to the bottom-line.

Since 2009, Microsoft has traded with a P/S range of 2.91 to 4.99 while averaging 3.64 times sales. At the half-decade average P/S ratio, MSFT would price out at $44.31. Ives' $49 requires investors to pay 4.02 times 2015's consensus or sales need to reach $111.2 billion using the five-year average P/S ratio.

As for earnings, MSFT's average P/E ratio in the last five-years was 13.34 with a min of 8.85 and a max of 20.39. Forty-nine bucks demands investors pay 17.07 times earnings. At 2015's consensus earnings estimate with the average P/E, Microsoft shares would trade at $38.29.

Overall: Microsoft Corporation (NASDAQ:MSFT) will need to trade at the upper levels of its historical P/S and P/E ratios to hit FBR Capital's $49 target. In all likelihood, Ives will have to be right regarding accelerating growth for $49 to happen.