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Microsoft Corporation is an American technology company that develops, licenses, and supports software, services, devices, and solutions worldwide. Some of the most well-known Microsoft products include the Microsoft Windows line of operating systems, Microsoft Office, Internet Explorer, Edge, Xbox video game consoles, Microsoft Surface, Skype, OneDrive, LinkedIn, and much more! Microsoft also offers support and consulting services to assist customers in developing, deploying, and managing Microsoft server and desktop solutions and training and certification to developers and IT professionals on Microsoft products. Microsoft sells its products through OEMs, distributors, and resellers and was ranked 21 in the 2020 Fortune 500 rankings of the largest US corporations by total revenue. MSFT is considered one of the big five companies in the U.S. tech industry and some believe that Microsoft should replace Netflix as one of the FAANG stocks (although, to be honest, FAAMG isn’t as easy to pronounce).
At the time of this writing (8/29/2021), MSFT is trading at $299.72 with a market cap of $2252.36B and a 52-week range of $305.84 - $196.25. In Q4 of 2021, Microsoft’s revenue grew to $46.2 billion (+21% year over year), operating income grew to $19.1 billion (+42% YoY), net income was $16.5 billion (+47% YoY), and diluted earnings per share was $2.17 (+49% YoY). Return of equity (ROE: Net Income / Total Equity *100) of Microsoft Corp. is 46.23%, the price to earnings ratio (P/E) is 36.31, and net margin (net income / revenue) is 36.45%. This financial analysis was done using financialstockdata.com (become a beta tester here). You can view MSFT’s 2021 Q4 earnings here and their 2020 Annual Report here.
This chart was generated by Financial Stock Data.
Microsoft is one of the five biggest technology companies in the world. It’s revenue is split fairly evenly across its intelligent cloud services, personal computing, and productivity and business processes. Microsoft has integrated itself into everyday business and education with Microsoft Office, OneDrive, and many of its other hardware and software products. The longevity of Microsoft is perhaps the most impressive aspect of the company, as it was founded in 1975 and is one of the largest corporations 46 years later. Microsoft is a dominant player in desktop operating systems (OS), claiming just under 73% of the global market share. Microsoft is also a major player in the office software space, with their Microsoft Office 365 suite claiming ~40% of the overall market behind Google’s G Suite with ~59%. Azure’s revenue has grown 23% and server products and cloud services have shown a 26% growth. It seems that every aspect of Microsoft’s business is growing, which is impressive given their diversified line of products. On top of this, Microsoft has proven effective in generating huge profit streams, even from their non-dominant (in terms of market share) products/services. For example, in our breakdown of Amazon, we reported that Azure has a market share of 19% (well behind Amazon’s AWS) but is still an incredible source of revenue for Microsoft. With their product diversification and ability to generate revenue streams, Microsoft is rightfully considered one of the top technology companies in the world.
Here are three points to support the bullish thesis:
- Diversified Business: Microsoft has three separate aspects to its business: intelligent cloud, personal computing, and productivity and business processes. No single aspect of the company makes up for more than 36% of the overall revenue, showing Microsoft’s strength in multiple aspects as well as its diversification of its overall business. With multiple streams of revenue that have a large market share in its respected industry make it seem difficult for Microsoft to fail. Microsoft is dominant in its desktop operating systems (OS) and it seems like that will always be the backbone of MSFT and the other sectors of the business have room to grow but are generating great revenue.
- Increase in enterprise IT spending: The worldwide enterprise IT spending across all industry markets will increase by an estimated 4.1% in 2021 and is expected to have 6.0% constant five-year CAGR in 2020-25 according to Gartner Research. As one of the leaders in this industry, Microsoft seems poised to generate more revenue from its IT assistance and its productivity and business process, which right now is Microsoft’s smallest revenue earner. Although it is not the smallest by much, ~0.1%, it can increase this revenue in this sector with the increased remote work load.
- Increasing need for Cloud Computing: Overall the COVID-19 pandemic has increased the remote working trend, which has increased the need for cloud computing. The global cloud computing market size is valued at $274.79 billion in 2020 and is expected to grow at a compound annual growth rate (CAGR) of a whopping 19.1% from 2021 to 2028. With the increasing emergence of Artificial Intelligence (AI) and machine learning, there will be an increasing need for cloud computing. The pandemic also is increasing in the ways businesses leverage smart technology such as mobile supercomputing, Internet of Things (IoT), big data, and AI seem primed to increase the need of cloud computing for businesses globally.
Here are three points to support the bearish thesis:
- Growing competition in the tech industry: It should be no surprise to readers that any company in the technology industry is facing increasing competition. Amongst Microsoft’s largest competitors are Apple, Oracle, Amazon, Google, IBM, and SAP SE. In machines and desktop operating systems, Microsoft’s biggest competitors are IBM and Apple (iOS); in office-related software suites and IT solutions, their biggest competitors are Google and Oracle; in cloud-based products/services, their biggest competition comes from Amazon’s AWS, which currently claims a larger market share. Each sector of MSFT is facing growing competition, which should keep investors on their toes.
- Vulnerability to cyber attacks: As is the case with many large technology companies, Microsoft is often the target of cyber attacks. Microsoft’s Exchange platform was recently the target of an attack that compromised personal data held on ~250,000 Exchange servers. Microsoft has thus far handled these attacks well, at least from a PR standpoint. They seem committed to open communication with customers (see for example, this article on the attack) and increased spending on cyber security. In fact, last week CEOs from big tech companies including Google and Microsoft committed to spending billions on cybersecurity following a meeting with the White House on cyber security concerns in the industry. Successful attacks on Microsoft could lead to a major loss in confidence in the company and cause consumers to move to a competing company.
- Acquisition difficulty in the tech space: Large companies, especially in tech, often rely on acquisitions to post growth. Unfortunately for these large companies, paths for small company growth are expanding (e.g., access to funding from VCs). According to a report on Statista, “2020 set a record for the amount of venture capital raised in the United States...In 2020, the value of venture capital investments in the U.S. amounted to approximately 130 billion U.S. dollars.” Access to this kind of funding can allow companies to grow on their own and avoid buyouts by large companies like Microsoft. As a recent example, Microsoft recently failed to negotiate an acquisition of Discord, an online chat service similar to Slack. The Wall Street Journal reported that Microsoft and Discord were in advanced talks about a $10B acquisition. In April, however, these talks came to an end as Discord appears to be eyeing it’s own IPO. According to a report by forgeglobal.com, Discord had raised ~$500M in VC funding.
Learn more about Microsoft Corporation here. Stay up to date on Green Candle by subscribing to our newsletter and following us on Twitter, Instagram, and YouTube!
Have a great week everyone,
Brandon & Daniel
Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.