Photo by Matthew Manuel on Unsplash
 

Microsoft (MSFT), one of the world’s largest broad-based technology companies, provides software, services, devices, and solutions to a wide range of consumer and enterprise markets. Among its leading global franchises are Windows, Office 365, Dynamics 365, LinkedIn, Teams, Azure, Microsoft Cloud, Power Platform, SQL-Server, X-Box, Bing search, and the Surface family of personal computers.
 

Market Leader

Founded in 1975, Microsoft helped launch the first great wave of information technology transformation by providing the operating software that made the personal computing (PC) revolution possible. Microsoft parlayed its lead in PC operating systems into application software with the development of Word, Excel, Outlook, and Powerpoint. Microsoft then solidified its early application software leadership position by bundling and discounting its offerings. Microsoft successfully entered the database software market with Access and SQL Server products.

Throughout its history, Microsoft has achieved success by taking a long-term approach and investing heavily in new and compelling products to enhance user productivity and experiences. As a result, Microsoft now boasts leadership positions in gaming with Xbox, Internet search with Bing, collaboration with Teams, client relationship management software (CRM) with Dynamics 365, social media with LinkedIn, and hardware with Surface-branded devices.

In 2012, Microsoft’s leadership pivoted to the cloud with heavy investments in Azure, which evolved quickly as a leader both in Infrastructure-as-a-Service (IaaS) and Platform-as-a-Service (PaaS) categories, currently generating about $45 billion in annual revenues. Meanwhile, Microsoft’s Azure franchise provides the launchpad for growth in secular trends including machine learning, business intelligence, and the Internet of Things, that promise to be as big, if not bigger, than previous waves of technological transformation and change.
 

Profitable Growth

During the past five years, Microsoft has clicked on profitable growth with revenues compounding 16% annually and EPS increasing at a 46% annual pace. During the past five years, Microsoft has booted up an exceptional 36.6% average return on shareholders’ equity with after-tax profit margins expanding and averaging north of 30%.
 

Exceptional Cash Flow

Microsoft generates exceptional cash flow with the company producing more than $65.0 billion in free cash flow during fiscal 2022. Microsoft returned nearly $49.0 billion to shareholders through net stock buybacks of $30.9 billion and dividends of $18.1 billion. Microsoft recently increased its dividend by 10% to $2.72 annually. While the stock currently yields a modest 1.1%, the payout ratio of less than 30% provides plenty of room for future growth. As of 9/30/22, Microsoft’s strong balance sheet boasted more than $107.3 billion in cash and investments, which provides the company with the financial flexibility to continue to handsomely reward shareholders while investing in future growth. Indeed, Microsoft entered into the metaverse when it agreed earlier this year to acquire Activision Blizzard—one of the world’s largest entertainment companies with nearly 400 million active players across 190 countries—for $95 per share in cash with the transaction valued at $68.7 billion. The acquisition, representing the largest in Microsoft history, will not impact Microsoft’s previously announced share buyback program and is expected to close in 2023
 

First Quarter Results

Microsoft reported fiscal first-quarter revenue increased 11% to $50.1 billion with operating income up 6% to $21.5 billion. EPS fell 13% to $2.35, mostly on higher taxes compared to last year. Results were powered by 24% growth in the cloud segment to $25.7 billion, led by strong demand across commercial businesses.

Microsoft is a high-quality market leader with a history of profitable growth and exceptional cash flows with substantial cash returned to investors through growing dividends and share buybacks. Buy.

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