What We Love:
Covid-19 has permanently changed work to a more online focus that helps Microsoft grow its Microsoft Office, Teams and hardware.
While Amazon has long dominated cloud computing, Microsoft is becoming a serious competitor as it leverages its already massive user base for its operating system into new Azure customers.
Microsoft owns and operates one of the two most popular gaming systems in the massively growing gaming industry.
Microsoft is reasonably priced compared to peers.
Microsoft has a massive moat to competition because its Windows operating system is the most popular in the world.
Microsoft faces fierce competition on multiple fronts.
Big tech faces many antitrust complaints that could in theory lead to a breakup of certain companies
Despite a great earnings report, the stock price failed to rise
Full Write Up:
Microsoft (Nasdaq: MSFT) is one of the biggest and oldest tech companies in business. Microsoft Windows has been the most popular computer operating system since the 1990s and still generates strong returns of about $13 billion in revenue from Windows in the first three months of 2021. Today Microsoft is much more than just Windows. The company offers a massive suite of computer applications (think Word, Excel and Powerpoint), is the second largest cloud computer provider in the world, and is a video game behemoth. Considering Microsoft’s strong position across multiple fast growing tech sectors, we at People’s Capital believe Microsoft is a strong investment.
“Over a year into the pandemic, digital adoption curves aren’t slowing down. They’re accelerating, and it’s just the beginning.” Says Microsoft’s CEO Satya Nadella about the massive user and revenue growth Microsoft has seen over the past year on its latest earnings call in late April. This is an astonishing statement, over the past year Microsoft’s operating income is up 27% year over year as Covid-19 has forced workers online and businesses to buy Microsoft’s products and services. Currently Microsoft Office has nearly 300 million paid users, Microsoft teams has 145 million daily users and more Surface Tablets were sold in the first 3 months of 2021 than any other quarter. If this truly is just the beginning of the digital adoption curve as Satya Nadella says, Microsoft has proven that it can and will profit and grow from the digital adoption.
On top of its traditional software applications, Microsoft’s Azure is the second largest cloud system in the world. We at People’s Capital believe this is where Microsoft’s true growth potential lies. While Amazon’s AWS is currently the largest cloud system in the world, Azure is gaining ground as it has grown at an astounding 46% yearly growth rate, which is much faster than Amazon. In fact, at this point it appears likely that AWS will no longer grow at incredibly rapid rates as many of its potential users are already customers. At the same time, Azure is at the beginning of its adoption curve. This is compounded by Microsoft’s large Windows and Microsoft Office user base who are likely to start using Azure as well since they are already Microsoft customers. Considering the dual promise of Azure’s early point in its adoption curve and Microsoft’s ability to turn Windows customers into Azure users, we at People’s Capital believe Azure has tremendous future promise as one of the world’s most powerful cloud computing systems. At the same time, it is also worth noting here that Azure already made $15 billion for Microsoft in the first 3 months of this year.
Microsoft is the 4th largest gaming company in the world with the Xbox console and video games. While the company has low profit margins on the Xbox console, it has over 18 million paid subscribers for its Xbox Game pass, which allows users to play video games without buying them outright. Through the game pass, Microsoft has seen its gaming revenue skyrocket to over $5 billion in the first quarter of 2021. Considering that most experts agree that this is just the beginning of an industry expected to be worth nearly $300 billion dollars in 2025, we at People’s Capital believe that Microsoft, as one of the two main video game console makers, has the opportunity to capture and lock in massive portion of the market with the Xbox and Xbox Gaming pass for the next decade.
Looking at Microsoft’s fundamentals, the company appears reasonably priced compared to competitors like Apple, Google and Amazon. Microsoft also has one of the largest moats to competition since over 75% of the worlds computers run on Microsoft software, which encourages users to use and adopt other Microsoft products while making it hard to switch away from Microsoft.
Despite being a promising investment there are some risks for Microsoft. As a company, Microsoft faces competition on nearly all its fronts. Amazon’s AWS is a fierce competitor in cloud computing and Apple creates compelling computer software along with its line of iPads that directly compete with Windows and the Surface tablet. At the same time, many big tech companies including Microsoft are facing calls to be broken up because of monopoly allegations. While Microsoft is not one of the tech companies coming under the most fire, it does face some small danger of a breakup were Congress to become aggressive toward tech companies. Finally, despite a strong earnings quarter, Microsoft’s share price has failed to rise, which could be a sign that investors are still skeptical of Microsoft’s long term prospects.
Overall, we at People’s Capital believe Microsoft is a strong investment in a variety of tech spaces for the next ten years. As a company Microsoft absolutely dominates computer operating systems, is a strong competitor in cloud computing and has tremendous growth potential in the gaming industry. While there is a small risk of a breakup, we believe this is highly unlikely as Microsoft has largely flown under the radar in recent Congressional hearings on tech monopolies. Considering all the above factors, we believe Microsoft is a strong investment on a 3 to 5 year horizon. It should be noted that this is a long term position, on a 3-5 year horizon. In the short term, depending on stimulus, the state of the pandemic, and general instability in the market, Microsoft could see declines before rising.
The People's Capital Team