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Microsoft is powering the second wave of digital transformation with the world’s largest and most comprehensive cloud platform.
But is Microsoft stock a buy? Let’s find out in this Microsoft Stock Analysis and Forecast.
What is Microsoft?
In 1975, Bill Gates and Paul Allen founded Microsoft — a play on the words “microcomputer” and “software”.
Windows and Office gave Microsoft control over the personal computer operating system market for decades.
In 2000, Steve Ballmer replaced Bill Gates as CEO during a tense period in Microsoft’s history; the Department of Justice was adamant about breaking up the company due to alleged anticompetitive practices.
Ballmer’s fourteen-year reign as the boss was immensely profitable yet controversial. Some accuse him of milking Microsoft’s assets (Windows and Office) without preparing the company for the future of the internet – Vanity Fair infamously called Ballmer’s regime “Microsoft’s Lost Decade”.
Today, long-time Microsoft engineer Satya Nadella serves as CEO and is restoring the company to its innovative roots.
Without completely abandoning its breadwinners, Microsoft is going all-in on its cloud computing efforts.
Microsoft was big tech before Big Tech, but it can’t afford another decade of lagging innovation. The rest of this report will analyze MSFT’s current position in the market and forecast its investment potential.
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MSFT Bull Cases
#1. Azure & Cloud Computing
Microsoft Azure is the company’s public cloud computing platform that offers the trifecta of cloud solutions: Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), and Software-as-a-Service (SaaS).
Azure is the cloud infrastructure that delivers on-demand computing services like Office 365 and Teams via the internet.
Microsoft customers no longer have to own and maintain their own centralized IT infrastructure – they outsource it and pay Microsoft to build, maintain, and manage the data centers.
Today, Azure accounts for 20% of the worldwide cloud infrastructure market, placing it behind Amazon’s AWS, which controls 32% of the ecosystem and ahead of Google Cloud’s nine percent.
Microsoft’s IaaS has been gaining on AWS by leveraging its full suite of SaaS products trusted by its loyal base; many customers prefer to integrate their existing Microsoft cloud products under the same roof and choose Azure over AWS.
Continued success in the cloud is Microsoft’s most important variable moving forward.
Related: Best Cloud Stocks
#2. Satya Nadella’s Culture Shift
Microsoft’s shift to the cloud was driven by Satya Nadella, who took over as CEO in 2014.
According to Nadella, Microsoft needed to focus on its remaining cloud computing opportunity or endure “irrelevance followed by excruciating, painful decline, followed by death.”
Under Ballmer, Microsoft was hesitant to pursue the cloud because it was naturally at odds with Windows: Azure replaces the need for internal Microsoft servers.
But Nadella’s urgency to embrace and drive technological change, instead of restraining it from keeping its ancient products alive, has allowed Microsoft to survive and thrive.
Wall Street has rewarded Nadella’s willingness to endure short-term pain in its products for the long-term success of the company. MSFT stock is up ~ 530% since he became CEO in 2014, which is more than Facebook and Google in the same time period.
Nadella’s growth mindset has convinced investors that Microsoft will successfully navigate the ever-changing technological landscape.
#3. Mergers and Acquisitions
Microsoft is one of a handful of $1 trillion companies and is not shy in breaking out the checkbook.
While Nadella is celebrated for his push to the cloud, we believe his M&A deserves some credit too. Most recently, Microsoft is in talks to buy social networking platform Discord for $10 billion.
Here are some of Nadella’s notable acquisitions:
- LinkedIn in 2016 for $26.2 billion
- GitHub in 2018 for $7.5 billion
- ZeniMax Media (Bethesda) in 2020 for $7.5 billion
Unlike some of Ballmer’s buys that were famously written down to zero, these are investments for the future, like ad-tech firm aQuantive purchased for $6.3 billion and Nokia for $7.2 billion.
Instead of merging these companies into self-product offerings, Microsoft allows them to operate independently and tap into Microsoft resources when necessary.
The Bethesda acquisition is particularly exciting as Microsoft looks to diversify growth beyond software and into its gaming division.
In fact, an analyst at Morgan Stanley believes that Microsoft could soon become the “Netflix of gaming” given the company’s 18 million Game Pass subscribers and 100+ million Xbox Live monthly active users.
The analyst added, “Microsoft not only could get an additional higher-margin, recurring revenue stream, but also a gaming franchise that is both accessible and extensible.”
A company’s moat refers to its ability to fend off competition; essentially, what does Microsoft have that is difficult to replicate?
Trust and experience. With the exception of Apple, Microsoft has at least two decades on the other FAAMG stocks and as much as 40 years on the newer companies in the SaaS market.
Companies and people trust Microsoft – disruptors can write better algorithms, but they can’t code up decades worth of relationships with customers.
This trust was most recently exemplified by the U.S. Army, which struck a deal worth up to $22 billion with Microsoft for futuristic headsets that soldiers will wear in combat — this is life-and-death level trust.
Combining this trust and experience with its rejuvenated posture makes Microsoft unlike any other company on the planet.
Microsoft has mistakes that lasted longer than some of its competitors have existed. While we have criticized those mishaps in this report, we believe they were vital to Microsoft’s development as a company.
It’s unlikely that the tech disruptors will be afforded the same luxury.
MSFT Bonus Moat: Microsoft has Excel and PowerPoint, which pretty much run the financial world.
MSFT Stock Analysis
Microsoft reported Q2’21 earnings on January 26 — let’s see the results:
- Earnings: $2.03 per share vs $1.64 per share expected, up 34% YoY
- Revenues: $43.08 billion vs. $40.18 billion expected
- Revenue increased 17% on an annualized basis
- Operating income was $17.9 billion, up 29% YoY
MSFT Q2’21 Revenue breakdown:
- Productivity and Business Processes (Office 365, LinkedIn, & Dynamics): $13.4 billion, up 13% YoY
- Intelligent Cloud (Azure, Windows Server, Github, & enterprise services): $14.6 billion, up 23% YoY
- More Personal Computing (Windows, gaming, devices & search advertising): $15.12 billion, up 14% YoY
The call included great news for Microsoft’s commercial cloud offerings:
- Cloud revenue increased 34% YoY to $16.7 billion
- Azure revenue grew 50% YoY
- Server products and cloud services revenue increased 23%
Microsoft does not release Azure revenue to limit comparisons to AWS.
Final highlights for MSFT’s Q2’21:
- Office Commercial products and cloud services increased 11%
- Xbox content and services revenue increased 40%
- LinkedIn revenue increased 23%
- Released $500 Xbox Series X
- Released $300 Xbox Series S
- Released Surface Laptop Go (small version of Surface Laptop PC)
- Returned $10 billion to shareholders (dividends and buybacks), up 18% YoY
Microsoft stock rose as much as 6% in extended trading after the January 26th call, recording a new all-time high for the first time in seven months.
MSFT Bear Case
The classic criticism of Microsoft was its stale desire for progress – we’ve now discussed at length how Nadella has and will continue to change this narrative.
But the sins of the father can still be seen at Microsoft. Many of the company’s new offerings are at odds with its legacy products and services.
For example, Azure is slowly making Windows obsolete. There’s no need for MSFT internal servers if it can be delivered faster and cheaper by the cloud.
There’s also a contradiction in Microsoft Office and Microsoft devices: access to Office used to incentivize buying the devices, but cloud-based delivery of Office allows it to run on any device, like a Mac.
These contradictions are better than MSFT, never choosing to innovate and enduring “irrelevance, followed by an excruciating, painful decline, followed by death”, but they’re still less than ideal.
Microsoft (MSFT) Top Competitors
Microsoft has had a target on its back since it started in 1975 – mostly from regulators, but more recently, other tech companies.
Here are Microsoft’s top competitors by offering:
- AWS (AMZN)
- Google Cloud (GOOG)
- Alibaba Cloud (BABA)
- Salesforce (CRM)
- Tencent Cloud (TCEHY)
- Oracle Cloud (ORCL)
- Salesforce (SaaS)
- Google Workplace (GOOG)
- Adobe Creative Cloud (ADBE)
- Box (BOX)
- AWS SaaS (AMZN)
- PlayStation (SNE)
- Nintendo (NTDOY)
- Prime Gaming (AMZN)
- Stadia (GOOG)
- NVIDIA SHIELD (NVDA)
- Apple (AAPL)
- Google (GOOG)
- Amazon (AMZN)
- Facebook (FB)
- Instagram (FB)
- Twitter (TWTR)
- Google Search (GOOG)
- Amazon Marketplace (AMZN)
- Yahoo! (AABA)
Related: Apple Stock Analysis
Microsoft Stock Allocation in Your Portfolio
The right amount of MSFT stock will vary from investor to investor – things like time horizon and investing goals are unique to each person.
However, the following questions may help gauge your confidence in MSFT’s investment potential:
- Can Azure continue to gain on AWS?
- Do younger tech companies have more upside?
- Do other FAAMG stocks have more potential?
- Can Nadella sustain his innovation initiative long-term?
- Is the Invesco QQQ ETF a better tech investment?
- Can Xbox fend off Google and Amazon’s push in gaming?
See: Tesla Stock Forecast
Additional MSFT Stock Analysis Coverage
The Motley Fool Stock Advisor has been covering Microsoft for 28 years – back when Bill Gates saved Apple with a bridge loan and when the DOJ accused him of bullying Google.
Learn More: Motley Fool Review
Microsoft Stock Analysis FAQs
Is Microsoft a buy hold or sell?
Microsoft receives a buy rating from most Wall Street analysts – given all the companies exciting initiatives, like cloud computing and its foray into the future of gaming, few are recommending to sell. If you’re fortunate enough to own MSFT, analysts are advising to hold or even buy more.
Is Microsoft a good stock to buy?
Since Satya Nadella took over as CEO in 2014, Microsoft stock has appreciated ~530% and outperformed Facebook and Google.
Many consider Microsoft a good stock to buy because its $1.3 trillion market cap makes it a stable company, but its ambitions suggest there’s still room for growth.
How high will Microsoft stock go?
Microsoft stock got as high as $232 per share following its most recent earnings call, a new all-time high for the stock. As of this writing, Microsoft stock is trading at new all-time highs of $242 per share.
Is Microsoft stock overvalued?
Relative to other high-flying tech stocks, Microsoft stock is not overvalued in our estimation. The Big Tech names that carried the market in recent years began cooling off in the Fall of 2020.
FAAMG stocks, specifically Microsoft, are quality companies that are undervalued relative to their historic fundamentals.
Does Bill Gates have shares in Apple?
In 1997, Bill Gates bought $150 million worth of non-voting Apple shares to save the Cupertino legend from bankruptcy (and to have a viable competitor to appease the DOJ). Bill Gates sold these Apple shares in 2003.
Years later, Bill Gates gave Warren Buffett’s Berkshire Hathaway $10 billion to manage, which made a giant purchase of Apple shares in 2019.
While Buffet has taken some profits off the table, Bill Gates still owns Apple’s shares via Berkshire Hathaway (BRK.B).
Bottom Line: Microsoft Stock Forecast
Microsoft’s future may be even more exciting than its past if Satya Nadella executes on his long-term objectives.
Nadella is taking Microsoft shareholders into uncharted territory – we believe the risk will be worth the reward.
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