Microsoft ($MSFT) needs very little introduction given that many of us have been using its products for much of our lives. The Sultan of Software and the emperor of personal computing, Microsoft truly is a sprawling empire. Its Microsoft Office Suite has probably been a pretty crucial tool for anyone who has spent a lot of the time in the office over the past decades. Despite missing the boat on social media and smartphones, the company has outwitted irrelevance by becoming one of the most versatile incapable players in the ever-important world of cloud computing. Revenue from Intelligent Cloud is now the company’s largest segment.
The company has been on a roll lately and like many of its large-cap technology peers the sheer prodigiousness of the company and the incessant need for its main products made it a safe-haven during the initial phase of post-pandemic investing. We think recent weakness in the name around rates should present an opportunity because the company has an unshakeable foundation with ample future paths to continued-high growth.
The company has proved remarkably competent at creating one of the stickiest products in modern history, the Microsoft Office Suite. The sales associated with this product have been given new life as work-from-home came to dominate the thrust of enterprise IT sales in the wake of the pandemic. Microsoft Office has the highest penetration in the productivity market. So what, the company has great software? Everyone knows that.
Cloud With A Scoop of Metaverse
The thing is that its strength here feeds into Azure and the cloud and the ubiquity of its product makes it easier to cross-sell products. Microsoft has a virtuous eco-system that enables it to be quite creative when it looks for merger partners, a major advantage when you’ve got over a hundred billion lying around. The old inflexible and combative Microsoft is a thing of the past as well. Whereas, the last CEO called open-source software a “cancer,” Satya Nadella has reigned over creating a cash-cow that eclipsed the company’s software dominance. Azure now hosts more accounts using Linux than Windows.
The cloud revenue that Google, Amazon and Microsoft derive should have continued support from the continued adoption of virtual reality and augmented reality. The functions and uses here should be exponentially increased by the metaverse. So, again you have secular forces supporting revenue, but Microsoft also has a leading product to help steer customers to its eco-system. This is where they have a major advantage, and growth has been consistently above consensus estimates in the past quarters. This is part of the reason we think that has occurred.
Age Before Beauty
There is a lot of talk about some of the new-fangled members of the FAANG cadre but on a 5-year basis, Microsoft and Apple are still showing the rest of the gang how to properly deliver to shareholders. While some FAANGs may be facing the existential threat of new anti-trust legislation that redefines the legality of business models in the digital age, Microsoft has become the cyber-security maven of the US government and Western World. In the old days, Microsoft’s behavior was more akin to the naughtiness and pushiness that Apple has been displaying with commercial partners.
Today, many enterprises seem to prefer the elder of the Seattle scions (Azure is growing revenue faster than AWS). It is a decidedly responsible corporate citizen compared to its peers which means it is insulated from the one major risk the rest of the FAANG stocks share. If you don’t think government policy can dramatically affect share price just look across the Pacific. Some of the current pieces of proposed legislation in the United States go way further at eroding the competitive advantage of big-tech business models than even the Chinese Communist Party went. Having big gone through their period of scrutiny will likely be a big advantage going forward.
The company’s established infrastructure is feeding into its growth initiatives. It is a leader in cyber-security and it is a key partner of the US government instead of an adversary to it. This can pay off and is more likely to when Uncle Sam is entering a generational great-power contest with the Communist Chinese. One of the key emerging areas of that competition is also a key area where Microsoft is investing to bolster its moat and continue its impressive strides.