Bright Future for Microsoft $MSFT

Macroeconomic overview: Ever since the outbreak of the pandemic, the tech industry has been facing with production line congestion and microchip supple shortage. Hardware manufacturing firms cannot keep up with the demand for their system and yield disappointing sales figures. Many companies must venture out and look out for different sections of the industry in order to offset their loss in hardware sales. For Microsoft case, people saw a change in direction which Microsoft headed to improve and promote their cloud base service and infrastructure to replace hardware sales deficiency, and it is paying dividends. Overview of the company Hardly any introduction or overview is needed for this tech giant. Microsoft is one the biggest company in the world who operates in multitude of industries such as manufacturing, software development, hardware development, services, entertainment. They own Microsoft Azure, a world leading cloud base service that acts as both a software and a platform for computing, analytics, storage, and networking purposes to support application development. Market fragmentation There is no cloud service similar to Azure that is dominating the market. Other services such as Amazon Web Services, Google Cloud Platform, IBM Cloud, etc. all choose different approaches for their system, and each capture a fragment of the market. This lack of standardization can both be a challenge and an opportunity for Microsoft. The fragmentation of the market disincentivize businesses to switch to a different platform once, or business to use more than one cloud provider. This can increase customer loyalty. Microsoft can utilize their dominance on personal computing sectors and improve on system integration between that and Azure can be competition advantage for Microsoft.  Cloud server is the direction for the future and Microsoft is heading that way. CEO of Microsoft claim 90% of Fortune 500 companies are operating with Dynamic 365, another Microsoft's powerful cloud base business service that integrates ERP and CRM and other utilities to support management automation. In 2017, Microsoft announced Xbox Game Pass, a monthly subscription service that allow subscribers to play any games they want on Microsoft gaming system. It is currently dominating the cloud gaming industry with more than 70% market share and boosting a healthy grow of 2% year over year. Sales figure Microsoft fiscal year report shows a 17.53% increase to last year revenue at $168,088 million. Their hardware sales were affected by the production congestion in the previous fiscal year, therefore despite a highly anticipated launch of a new gaming console in 2020, their sales increase is only 4% higher compare to 2020 fiscal year ended.  Q4 2021 and Q1 2022 showcase strong performance on Microsoft cloud and server revenue with 34% and 31% growth respectively. Their launch of Windows 11 in this year has been met with disappointing sales figure once again to due supply issue. Strong emphasis on cloud service for the past few years have paid dividend for Microsoft, they dominate the gaming cloud service sector while hold a strong market competitive advantage with Azure in a fragmented market.  The strong growth figure could just be a start, however. Daniel Webb, a Wedbush analyst estimates that only more than a quarter of existing Microsoft users have switched to cloud base service. With the existing customer base that already consuming Microsoft products for day-to-day usage, with strong integration from cloud service and their existing software and systems, there is a lot of room for their cloud service to grow. Speculation for the future Microsoft D/E ratio has been on the decline for the past 5 years, reduce the risk to invest in Microsoft and showing a shift to equity to finance their operation. The rise of inflation rate recently might also see an increase in interest rate, which can further Microsoft trend of decreasing D/E ratio. The more optimal way to increase capital would be through share issuances, which can stimulate Microsoft shares can see an increase in market price. Their high ROE and low Payout Ratio in the most recent five years determines high reinvestment rate back to the operation, alarming investors Microsoft's intention for expansion. Using the DCF, the fair value of MSFT is $467 per share, meaning the current market share of $MSFT is undervalued. This valuation only takes into account of Microsoft current sales performance. With hardware sales in the future returns to pre-Covid mark, potential for growth is still plenty for this tech giant.

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Bright Future for Microsoft $MSFT

Dec 8, 2021

bullish

fundamentals Analysis

[3 min Read]

Macroeconomic overview:

Ever since the outbreak of the pandemic, the tech industry has been facing with production line congestion and microchip supple shortage. Hardware manufacturing firms cannot keep up with the demand for their system and yield disappointing sales figures. Many companies must venture out and look out for different sections of the industry in order to offset their loss in hardware sales. For Microsoft case, people saw a change in direction which Microsoft headed to improve and promote their cloud base service and infrastructure to replace hardware sales deficiency, and it is paying dividends.

Overview of the company

Hardly any introduction or overview is needed for this tech giant. Microsoft is one the biggest company in the world who operates in multitude of industries such as manufacturing, software development, hardware development, services, entertainment. They own Microsoft Azure, a world leading cloud base service that acts as both a software and a platform for computing, analytics, storage, and networking purposes to support application development.

Market fragmentation

There is no cloud service similar to Azure that is dominating the market. Other services such as Amazon Web Services, Google Cloud Platform, IBM Cloud, etc. all choose different approaches for their system, and each capture a fragment of the market. This lack of standardization can both be a challenge and an opportunity for Microsoft. The fragmentation of the market disincentivize businesses to switch to a different platform once, or business to use more than one cloud provider. This can increase customer loyalty. Microsoft can utilize their dominance on personal computing sectors and improve on system integration between that and Azure can be competition advantage for Microsoft.

Cloud server is the direction for the future and Microsoft is heading that way. CEO of Microsoft claim 90% of Fortune 500 companies are operating with Dynamic 365, another Microsoft's powerful cloud base business service that integrates ERP and CRM and other utilities to support management automation. In 2017, Microsoft announced Xbox Game Pass, a monthly subscription service that allow subscribers to play any games they want on Microsoft gaming system. It is currently dominating the cloud gaming industry with more than 70% market share and boosting a healthy grow of 2% year over year.

Sales figure

Microsoft fiscal year report shows a 17.53% increase to last year revenue at $168,088 million. Their hardware sales were affected by the production congestion in the previous fiscal year, therefore despite a highly anticipated launch of a new gaming console in 2020, their sales increase is only 4% higher compare to 2020 fiscal year ended.

Q4 2021 and Q1 2022 showcase strong performance on Microsoft cloud and server revenue with 34% and 31% growth respectively. Their launch of Windows 11 in this year has been met with disappointing sales figure once again to due supply issue. Strong emphasis on cloud service for the past few years have paid dividend for Microsoft, they dominate the gaming cloud service sector while hold a strong market competitive advantage with Azure in a fragmented market.

The strong growth figure could just be a start, however. Daniel Webb, a Wedbush analyst estimates that only more than a quarter of existing Microsoft users have switched to cloud base service. With the existing customer base that already consuming Microsoft products for day-to-day usage, with strong integration from cloud service and their existing software and systems, there is a lot of room for their cloud service to grow.

Speculation for the future

Microsoft D/E ratio has been on the decline for the past 5 years, reduce the risk to invest in Microsoft and showing a shift to equity to finance their operation. The rise of inflation rate recently might also see an increase in interest rate, which can further Microsoft trend of decreasing D/E ratio. The more optimal way to increase capital would be through share issuances, which can stimulate Microsoft shares can see an increase in market price. Their high ROE and low Payout Ratio in the most recent five years determines high reinvestment rate back to the operation, alarming investors Microsoft's intention for expansion.

Using the DCF, the fair value of MSFT is $467 per share, meaning the current market share of $MSFT is undervalued. This valuation only takes into account of Microsoft current sales performance. With hardware sales in the future returns to pre-Covid mark, potential for growth is still plenty for this tech giant.

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MSFT

Microsoft Corporation

261.31

4.83
1.88%

Return

-21.99%
Change % Since Posting
-73.65
Change Since Posting
334.96
Price When Posted

Metrics

401.95
Target Price
7/ 10
Confidence
6-12 Months
Timeframe
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Earnings Per Share
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Financials
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Management
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