Microsoft rose to dominate the personal computing operating market during the 1980s with its Microsoft Disk Operating System (later Windows) and later Microsoft Office began to dominant Productivity Software with its suite of applications (word, excel).
Consistent high margins have translated into high returns on capital employed and equity – facilitating strong cashflow generation for Microsoft and helping the group to self-fund its growth through capital expenditure and acquisitions without the need for excessive use of debt. Microsoft’s growth has been strong over the long-term – with revenues growing at 15.1% compound per annum since 1994 and earnings per share growing at 16.8% compound per annum over this 27-year period.
More recently, Microsoft has been diversifying the business into other areas of technology, with a specific focus on cloud computing since the current CEO took over in 2014. The group has also been focused on increasing its presence in gaming, highlighted with the agreement to acquire Activision Blizzard, as well as transforming its suite of productivity software by emphasising higher quality, recurring subscription revenues over on-premise licences.
Cloud computing now represents circa 45% of revenues and is expected to be the key driver of growth over the medium-term – with Microsoft Azure holding a 21% market share in the global cloud computing market. Growth in its user base and continued improvement and innovation of its office offering – which should allow for higher average revenues per user – offers the potential for continued growth for Microsoft 365. Furthermore, the video gaming market is exhibiting strong growth, driven by the continued growth in internet access, the rise of cloud gaming, social gaming, e-sports and changing demographics.
In mid-March, we picked up full coverage of Microsoft with a detailed research note – covering the three key risks in a company: business, financial and valuation. Of course, what generally comes with a top-quality company such as Microsoft is a higher valuation, and one must decide whether he/she is paying the right price for the potential future growth. The full research note is now available in the members’ area of our website.