Is Microsoft's meteoric rise set to continue?

Founded in 1975, Microsoft has risen to become a pinnacle of the technology industry.? With a current valuation of $2.5 trillion, it's the second-largest company in the world (behind Apple).

Demonstrating stellar share performance over the past 10 years, there appears little reason why Microsoft's (MSFT) stock won’t continue in the same trajectory moving forward.

As a business, Microsoft has continually demonstrated an eagerness to pursue new growth opportunities. ?This has contributed to its ongoing success - over the last 10 years, Microsoft’s value has risen by over 1000% (as a comparison, the S&P 500 has risen by around 170%).

Earlier this year, Microsoft reported Q4 earnings per share of $2.69 on revenue of $56.2 billion, exceeding analyst estimates. Full-year revenue was $211.9 billion with earnings of $9.68 per share.

Key drivers helping fuel Microsoft’s growth in recent years include its cloud computing platform, Azure and the productivity software suite, Microsoft 365.? Microsoft has strategically positioned itself in lucrative markets by leveraging emerging technologies and responding to industry demands such as the shift to remote working environments and the exploration of AI technology for greater workplace productivity.

Below I look at Microsoft's revenue breakdown by their business segments which reveal the company's areas of strength, potential growth and opportunities for investors.

Intelligent Cloud

Microsoft's Intelligent Cloud segment consists of server products and cloud services including Azure, SQL Server, Windows Server, Visual Studio, and GitHub.? It also includes Enterprise Services, such as Enterprise Support Services, Industry Solutions (formerly Microsoft Consulting Services), and Nuance professional services.

Azure sales in 2023 represented more than half of Microsoft's total $110 billion of cloud-related revenue, the first time that Azure has reached that milestone.

With solid foundations and technological innovations, Microsoft's Intelligent Cloud segment achieved substantial growth during the pandemic years, on the back of global digital transformation and the migration of workloads to the cloud.

Azure has been particularly popular for businesses wanting to scale, taking advantage of Azure's global data centres, cloud-hosted virtual machines, website hosting, machine learning services and serverless computing.

With a pay-per-use business model, Azure charges businesses based on computing time. This makes Azure an affordable option for many businesses.

The Q4 growth was also fueled in part by Azure OpenAI, Microsoft’s cloud service for businesses that incorporates OpenAI’s artificial intelligence tools.? Since mid-May, the customer base has grown from 4500 to 11,000.?

It's worth noting that the entire cloud infrastructure services market increased by US $10 billion in the second quarter of 2023 year over year. Worldwide spending on enterprise cloud infrastructure services reached nearly US $65 billion in the second quarter, representing a growth rate of 18%, or US $10 billion year over year.

According to Precedence Research, the global cloud services market size was valued at US $454.2 billion in 2022 and is expected to hit around US $1630 billion by 2030, growing at a registered CAGR of 17.32% from 2022 to 2030.

This suggests there is ample space for Azure to gain more ground in terms of market share against its main competitors, Amazon's AWS and Google Cloud.

Productivity and Business Processes

Microsoft's Productivity and Business Processes segment includes Office 365, Linkedin and Dynamics business solutions - the second largest revenue division for Microsoft. In Q4, the segment recorded revenue of $18.3 billion, demonstrating a 10% growth rate.

Within this category, Office Commercial products and cloud services revenue rose by 12%, driven by a substantial 15% growth in Office 365 Commercial revenue. Office Consumer products and cloud services revenue also increased by 3%, and the number of Microsoft 365 Consumer subscribers reached an impressive 67.0 million. Additionally, LinkedIn revenue experienced a solid 5% growth and the Dynamics products and cloud services segment performed exceptionally well, with revenue surging by 19%, primarily driven by a 26% growth in Dynamics 365 revenue.6

The products in this segment are widely used by people and businesses around the world for document creation and collaboration.? With Office tools that are interconnected, users are able to collaborate in real time.? Teams has become a popular tool for remote working and is the collaboration platform of choice for many businesses using its video and messaging functions.? The inherent 'stickiness' of the ecosystem could contribute to ongoing revenue through licences and subscriptions.

More Personal Computing

The More Personal Computing segment consists of products and services that put customers at the centre of the experience. These include the Windows operating system, devices such as Surface and PC accessories, and gaming, including Xbox hardware and content.??In Q4, Microsoft reported revenue of $13.9 billion, indicating a slight decrease of 4%. Windows OEM revenue saw a decline of 12 %, and Devices revenue dropped by 20%. Nonetheless, Xbox content and services revenue experienced a positive growth of 5%.

The gaming division helped Microsoft achieve a decent share of the gaming market in the past few decades. In the first quarter of 2023, the top 10 gaming companies by revenue were Tencent, Sony, Apple, Microsoft, NetEase, Google, Activision Blizzard, Electronic Arts, Nintendo, and Take-Two Interactive.

First-party intellectual properties like Halo, Gears of War and Forza Motorsport have supported Xbox hardware sales and although Microsoft has lacked offering more exclusive titles over the past few years, it has taken steps to win back its gaming audience. This includes making its Xbox Game Pass subscription service more affordable to acquiring more gaming studios like Bethesda and Mojang.

In January 2022, Microsoft announced the proposed acquisition of Activision Blizzard which has been delayed due to concerns raised by the UK Competition and Markets Authority.? Microsoft has?restructured the transaction to acquire a narrower set of rights, including executing an agreement that transfers?the cloud streaming rights for all current and new Activision Blizzard PC and console games released over the next 15 years to Ubisoft Entertainment SA, a leading global game publisher.

Acquiring Activision Blizzard will give Microsoft access to multi-million dollar IPs such as Call of Duty, Overwatch, Diablo, and WarCraft franchises, as well as studios such as Treyarch and Infinity Ward, at a time when video game IP is proving highly valuable.

The company would also become a major stakeholder in esports, gaining access to esports leagues and platforms such as Major League Gaming, the Overwatch League, and the Call of Duty League.

ChatGPT

Since investing US $10 billion into OpenAI, Microsoft has prioritised integrating AI into its existing technology ecosystem, making it more accessible to users. This includes designating Bing as the default search engine for ChatGPT and integrating ChatGPT with Microsoft's productivity tools such as Word and Excel.?

Microsoft has also announced an AI-powered premium version of its Microsoft 365 product, which allows access to Microsoft Copilot; an AI assistant that works across Microsoft apps to help automate tasks as well as create content. This includes things like auto-generative PowerPoint Presentations and taking notes in Microsoft Teams meetings.

According to Microsoft, Copilot will be available for $30 US per user per month, although it’s unclear when it will be available on a mass scale.??Presently available to around 600 enterprise customers globally, this is expected to increase substantially in the next quarter.

Microsoft’s integration of the technology behind ChatGPT could be a major impetus for future growth. In addition, growth catalysts not directly related to AI are also in play, including its expansion in the video game industry.

According to a court filing released in June, CEO Satya Nadella’s goal is to take Microsoft to $500 billion in annual revenue by 2030. Hitting this goal would represent cumulative revenue growth of around 136.5%, based on the company’s forecasted revenue for the current fiscal year ($211.38 billion).

Almost every US ETF contains exposure to Microsoft, a testament to it being viewed as a blue chip stock with long-term potential.? In my view it is a stock worth holding directly, however, I have highlighted two ETFs below that provide access to Microsoft as well as other technology stocks. Please do not hesitate to contact me about Microsoft or your investment strategy in general.

Global X FANG ETF

ASX: FANG

In a single trade, FANG delivers access to multiple disruptive macro-trends arising from technological advancements, changing demographics and consumer preferences.??Next-gen technology spans multiple segments, and its most innovative companies include both household names and newcomers from around the world. Download Factsheet

VanEck MSCI International Quality ETF

ASX: QUAL

Access the world's highest quality companies based on key fundamentals including high return on equity, earnings stability and low financial leverage.??Investments focus on companies with quality characteristics that have outperformed over the long term relative to global equity benchmarks. Download Factsheet

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