Microsoft is a massive company with its foot in just about every major technology business line - operating systems, productivity tools, operating systems, productivity tools, cloud services, AI and ML, video games and consoles, hardware, and advertising tools and services.
Microsoft products and services are found in most people’s homes and businesses around the world. Microsoft benefits from a reputable brand name due to customers facing high switching costs for competing services, the products having seamless integration with thousands of devices and other software, and Microsoft keeping pricing reasonable because of scaled economies.
Azure is growing at rapid rates and may outpace AWS at some point this decade. This growth can be attributed to Azure's good pricing, integration with software found across thousands of organizations, leadership in hybrid cloud, and neutral business model that does not directly compete with customers.
Microsoft can exercise optionality using its corporate relationships, data, and strong presence in the gaming market. AI, ML, the creator economy, and Xbox Game Pass present potentially ground-breaking opportunities this decade, particularly in the latter half.
Microsoft is an innovator - just five to ten years ago, nobody could have seen today's breadth of products and services coming. Its management team is highly competent, and the company can attract top talent well to continue this momentum.
Key Company Metrics
A set of metrics we constantly keep updated to monitor the investment thesis.
Microsoft Office is so deeply ingrained into society that millions of job descriptions and resumes ranging across many professions would need to change. Additionally, the re-training and re-learning costs and time spent to learn another set of productivity tools and ensure widespread compatibility across platforms would likely be too large an obstacle for the world to overcome.
Microsoft Azure is similar in this regard - it is used by virtually every major company in the world, having been integrated into 95% of the Fortune 500's business processes. A Microsoft product will find its way into an individual's or an organization’s property at some point, whether they like it or not.
Microsoft has been creating computer products and services for almost 50 years, gaining a strong reputation for quality, innovation, and governance along the way.
Microsoft products are found on hundreds of millions of computers today, and the number and variety of product offerings continue to expand with incredible customer uptake. Microsoft is a name customers appear to always believe in given the relevance its products have in our lives.
Economies of Scale
Microsoft's fast-growing cloud business benefits from huge economies of scale.
Microsoft's large data centres can deploy computing power at a lower cost per unit and allocate computing resources more effectively than smaller data centres.
There are also scaled economies inherent in the multi-tenancy location structure, in which new capability rollouts can be applied to multiple tenants at once and infrastructure costs are shared among many tenants.
As Microsoft Azure expands, so will its margins.
Microsoft has access to tons of customer data across its vast stack of product and service offerings. The company has direct insight into its customers' needs throughout different personal and business functions. It uses data to innovate and develop new products and services that allow individuals and businesses to be more productive and more effective in their daily tasks.
A world of optionality is also open to Microsoft, who can use the data to innovate in areas beyond its current suite of products and services.
Windows captures about 73% of the world’s operating system market and Office 365 dominates the productivity tools market with almost 90% of market share. Despite having massive market share in both areas, Microsoft continues to innovate to increase its value proposition to its customers with a secular trend in technology spend globally helping them.
Azure is the fastest-growing cloud platform of the three major cloud platforms - AWS, Azure, and Google Cloud Platform ("GCP"). AWS is consistently growing at mid-30% rates while Azure can maintain year-over-year growth rates of around 50% despite only being launched two years after AWS (AWS - 2006; Azure - 2008).
Microsoft has some of the best assets to play a large role in the development of the metaverse. This immersive version of the internet (see Microsoft's interpretation of the concept here) is most likely to flourish within an ecosystem that can be easily integrated and is already used by many people. If not, the company would need to undertake a customer acquisition campaign rather than simply transitioning users from one platform to another.
Microsoft currently leads in enterprise AI, which helps financial services, healthcare, government, manufacturing, and retail organizations streamline operations by avoiding redundancies, improve decision-making, and find critical information quicker. Microsoft is betting big on the AI front - it completed the acquisition of Nuance Communications in March 2022, a voice technology solution company with the aim to reduce the need for doctor note-taking and better predict patient needs, to bulk up its healthcare AI portfolio and research.
Microsoft is growing revenues at rapid rates, especially its cloud segment. When a business is growing at a high run rate, its share price is more susceptible to whipsaws.
If the cloud or productivity tool markets slow, Microsoft loses share to competitors, or guidance is lowered, shares of Microsoft could drop substantially. Microsoft is not particularly cheap - there is room for downside if the business faces challenges.
General Competitive Risks
Windows market share has been steadily declining from 95% market share in 2009 to 73% today due to the growth in Apple’s OS X; Google Workspace is an attractive alternative to Microsoft 365; Sony's Playstation is still the global console leader; AWS is larger and currently more popular than Azure and controls the IaaS and PaaS market; Google and Facebook advertising are powerful tools for marketers and Amazon Advertising is a fast-growing segment.
Microsoft faces intense competition in virtually all segments which may impair their ability to emerge as leaders or capture enough incremental market share to grow as expected.
Microsoft holds high market share in Windows, productivity tools and services, and cloud, naturally attracting regulatory probes and antitrust complaints. US President Joe Biden recently issued an executive order that directs the Federal Trade Commission ("FTC") to make anti-competition rules more stringent.
The FTC launched a probe last year of the acquisitions made by large technology companies, including Microsoft and Amazon, between 2010 and 2019. Microsoft, being a company worth over $2 trillion, will also attract antitrust attention if its "big tech" peer group comprised of Amazon, Facebook, Google, Apple, Netflix, and others, face antitrust scrutiny. Heightened regulatory oversight and stricter rules could make it more difficult to do business and grow.