• Reinhardt Coetzee


In the new "digital-economy" with businesses rapidly transitioning to remote working and increasing digital adoption, MSFT is one of those companies that should continue to benefit and take an even greater lead in this space. From video conferencing and online team collaboration via its Teams software to the Xbox gaming division, Microsoft and its products are seeing increased demand and many avenues for growth.

◾ World's largest software company

Microsoft (MSFT) has a market cap of ~$1.4 trillion (up ~40% YoY), the largest in the world. Today MSFT is the world’s largest software and cloud computing enterprise which sits at the intersection of digital transformation and cloud adoption and enjoys a broad portfolio of strategic products.

◾ Transformation to growth stock

Since Satya Nadella took over the reins from former CEO Steve Ballmer, MSFT shifted focus to selling subscription-based cloud services from the traditional packaged software (Windows/Office). In 2019 (Year End-June), the company’s “Server products and cloud services”, which includes SQL Server, Windows Server, Visual Studio, GitHub, and Azure reported revenues at $32.6 billion, highest amongst MSFT’s products and services offerings. In comparison, the traditional “Windows” revenue was $20.3 billion in the same year.

◾ Cloud strength

MSFT has emerged as the second-largest vendor of cloud computing services in the world right behind Amazon. During 9M20 (Jul-19 to Mar-20), the company’s revenue from intelligent cloud solutions was $35 billion (FY19: $39 billion), comprising ~33% of the total revenue. Within it, the company’s Azure unit, which supplies cloud-based processing and storage and competes directly with Amazon Web Services (AWS), grew by 60% as compared to 9M19, driven by higher contribution from consumption-based services like infrastructure-as-a-service and platform-as-a-service, and per user-based services such as Enterprise Mobility + Security.

Surges in usage and growing customer demand due to increasing digitization, prospects for better unit economics, and the advent of edge computing are driving MSFT’s cloud business. Companies such as MasterCard, Autodesk, AARP, and Coca Cola chose Microsoft 365, Dynamics, and Azure for a 5-year multi-cloud agreement in the recent quarter (ended Mar-20). MSFT also recently won the Department of Defense’s JEDI contract worth up to $10 billion against Amazon, further highlighting its competitiveness in the field of cloud computing.

With increasing adoption, vendors have been progressively making cloud services integral to their business model. Gartner forecasts the worldwide public cloud services revenue will grow to $331 billion by 2022 from $182.4 billion in 2018 translating to a CAGR of 16%.

Azure is the keystone of MSFT’s cloud service business. Though Azure was launched in 2010, concerted efforts for Azure began in 2013 (seven years after AWS launch). Yet still, MSFT has been able to capture a large foothold owing to its 40-year history in enterprise technology and rich expertise in servicing clients experiencing shifting business objectives. Moreover, though cloud pricing is complex Azure has been apparently less expensive than AWS or Google Cloud Platform (GCP).

◾ Road-map for growth

Over the years, MSFT has devoted significant resources to develop and deploy its cloud-based strategies, with overall Capex doubling from $8.9 billion in FY16 to $16.9 billion in FY19 (9M20: $13.2 billion). Over the same period, R&D spending has been maintained at ~13.5% of revenues, with 9M20 spending at $14 billion (FY19:$16.8 billion). Also, the concerns of time lags require high capital investments in local data centers and edge computing networks.

To take on the upcoming challenges, MSFT is steadily strengthening and integrating its multiple revenue streams. Take for instance its LinkedIn, gaming, and search advertising segments.

MSFT’s primary customers are medium and large businesses. With 92% of the Fortune 500 companies, 90 million senior-level influencers, and 63 million decision-makers on LinkedIn the company is creating an ecosystem for enterprises. Revenues from advertising, premium subscriptions, Talent Solutions have tripled LinkedIn revenues from $2.2 billion in 2017 to $6.7 billion in 2019. Integrations between LinkedIn Sales Navigator and Microsoft Dynamics and LinkedIn profiles and Office apps are already creating synergistic opportunities whereas LinkedIn Learning has the potential to be a rich skill-Ed platform itself.

The overall strength of the company has made it one of the key beneficiaries in the hybrid cloud era. With a continued focus on Azure and on-going cloud transformation, the company is expected to sustain this period of growth and profitability.

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Stock returns for portfolio and individual  trade returns correct as of 2022/02/03

© 2022 by reinhardtcoetzee.com

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