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Microsoft (NASDAQ: MSFT) once considered a mature technology stock that was property of stability and income rather than growth. But in the past five years, Microsoft’s stock has recovered approximately 300%, as a visionary CEO turned his business upside down.
Satya Nadella, who succeeded Steve Ballmer in 2014, reduced Microsoft’s dependency on Windows and Office license sales and expanded its ecosystem with a “mobile first, cloud first” mantra. Nadella abandoned the company’s Windows Phone and smartphone ambitions, launched mobile versions of its apps on iOS and Android, and aggressively expanded its cloud services.
Image source: Microsoft.
That transformation initially accelerated profit growth, but it was worth it as the commercial cloud business, which included Office 365, Dynamics 365, and Azure, became its new growth engine. Microsoft also expanded its Surface and Xbox businesses to maintain a healthy presence in the PC and gaming markets, respectively.
Those strengths fueled Microsoft’s results during the COVID-19 crisis, and its shares have grown nearly 11% so far this year, even when S&P 500 slipped above 12%. But looking further ahead, will Microsoft continue to outperform the market?
Microsoft’s core strengths
Windows represents almost 80% of the desktop OS market, according to StatCounter, while Office controls almost 90% of the email and authoring market, according to Gartner. Microsoft leveraged its dominance of both markets to transform Windows and Office into cloud-based services. Microsoft initially gave away Windows 10 as a free update; The addition of a cloud-based app store and updates makes it more similar to iOS and Android.
Image source: Microsoft.
Microsoft then switched Office users from regular updates to a subscription-based model with Office 365 and expanded its Dynamics CRM (Customer Relationship Management) platform as a cloud-based service. It also expanded Skype to compete against Looseand acquired LinkedIn to lead the market niche of professional social media.
To support these services and the cloud storage and processing needs of business customers, Microsoft expanded its Azure cloud infrastructure platform, which now ranks second in the market after Amazon Web services (AWS).
Azure’s market share grew from 14.6% to 17.6% between the fourth quarters of 2018 and 2019, according to Canalys, as AWS’s share fell from 33.4% to 32.4%. Microsoft also notably won the Pentagon’s coveted $ 10 billion cloud JEDI contract, though Amazon is trying to delay the deal with a lawsuit.
In the hardware market, Microsoft forced the laptop market to evolve with Surface, which created a new niche for 2-in-1 devices. And it continues to challenge Sony in the Xbox One gaming console market and expanded into the augmented reality space with HoloLens. It also wisely stripped most of its graphic advertising business and partnered with Apple to display your productivity apps on iOS.
Microsoft’s main weaknesses
Microsoft’s commercial cloud revenue grew 39% annually in its fiscal second quarter and represented more than a third of its top line, but the business still faces strong competition from AWS and other rivals in the platform market in the cloud, Sales force in the cloud CRM marketplace and numerous smaller companies, including Slack and Focus – in the cloud-based collaboration market.
Microsoft’s most personal computing segment, which generated 36% of its revenue last quarter by selling Windows licenses, hardware devices, Xbox consoles, and its search-based ads, also remains exposed to headwinds. more than your cloud business. Microsoft withdrew its guidance for the unit in late February, and it’s unclear whether the growth of its cloud services may offset that slowdown.
Microsoft’s gaming revenue also declined over the past year, as customers postponed their hardware updates prior to the launch of the Xbox Series X in late 2020. However, Microsoft sold fewer Xbox One than Sony sold PS4 in recent years. five years, and that gap could widen if Microsoft makes a mistake in the next release.
So how much higher can the stock go up?
Wall Street expects Microsoft’s revenues and earnings to increase 12% and 18%, respectively, this fiscal year. The stock isn’t cheap at nearly 30 times the anticipated earnings estimates, but Microsoft’s strengths, especially in the cloud market, possibly justify that premium valuation.
Microsoft already has a massive market capitalization of $ 1.33 trillion, so it might not be realistic to expect returns from multiple labels in the next five years. However, the stock may go even higher as its “mobile first, cloud first” strategy offsets the diminishing importance of its legacy businesses.
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