Microsoft: The Beast Has Awakened

Quick Summary

Microsoft (MSFT) is one of the largest consumer and enterprise software vendors in the world. The company's current structure consists of 3 units. Productivity and Business Processes (33% of revenue, 38% of profits) contains both legacy Microsoft Office and Office 365 cloud products, Exchange Server, LinkedIn, Skype, and Dynamics / Dynamics 365 enterprise resource planning (ERP) suite. Intelligent Cloud (31%; 32%) consists of cloud platform-as-a-service offering Azure, Windows Server operating system, and SQL Server database software. Finally, the "More Personal Computing" segment (36%; 30%) is comprised of Microsoft's consumer offerings, including Windows Client operating system (what your laptop uses), Xbox hardware and gaming divisions, Surface devices, and Bing search.

Does The Company Have Recurring And/Or Rising Revenues?

YES. Microsoft has successfully executed a transition from a traditional perpetual license-and-upgrade model to a cloud-based software-as-a-service model under CEO Satya Nadella. Recurring cloud subscriptions (mainly from Office 365, Dynamics 365, and Azure) now make up 30% of revenues, from just 17% 3 years ago, and continue to be the fastest growing parts of the business at 30% year-over-year. Overall, Microsoft has delivered a 3 year annual revenue growth rate of nearly 14%, very impressive for a company of this size. Even its non-cloud revenue sources, such as operating systems, act effectively as a "toll" on global PC and server hardware sales, making them very reliable and predictable. We feel Microsoft has both good growth prospects and a reliably recurring revenue model.

Does The Company Have Durable Competitive Advantages?

YES. Microsoft has one of the wider competitive moats in the entire business world. It maintains a near-monopoly on both client operating system software (85%+ market share) and office productivity software (88%), despite decades of competition, much of it freely available. This is due mainly to strong NETWORK EFFECTS. Windows dominated the early PC era. People learned it at work, which in turn drove demand for Windows on consumer PCs, which in turn led developers to develop software exclusively for Windows. Similar effects happened in Office, where many businesses continue to rely heavily on Outlook (email), Excel (spreadsheets), and PowerPoint (presentations). This naturally leads to HIGH SWITCHING COSTS, particularly in large organizations where bedrock software systems change very slowly. Azure and Dynamics are particularly difficult to switch from, as they form critical IT and business process infrastructure. In a nutshell, businesses rely on Microsoft products to operate, and consumers are familiar with it and see little reason to switch. Microsoft has enjoyed this moat for decades and we see it continuing for the foreseeable future.

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Disclaimer: The content is provided by Alexander Online Properties LLC (AOP LLC) for informational purposes only. The material should not be considered as investment advice or used as the basis ...

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