MSFT: Microsoft Stock Research
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Summary of Operations
Leveraging the dominance of the Windows operating system, Microsoft has expanded into creating an ecosystem of goods and services supported by its cloud infrastructure. New value is created not merely from innovative product lines and acquisitions but by integrating them into this MS ecosystem. This creates convenience and ease for the consumer. Seemingly without limits, the MS consumer includes individuals, households, small businesses, and other giant corporations. With low maintenance costs, efficiencies from centralization, and a steady flow of revenue from subscription models, Microsoft is a cash cow with minimal debt.
Strategy
MS’s current focus is adding features to this ecosystem through horizontal expansion. By investing in clone-able data centers that can facilitate the processing needs of everything on its cloud, it can continue to grow and sustain the expansion of technology into all facets of life. Where it does not add centers, it will acquire new businesses, brands, and intellectual properties that can be integrated into the cloud infrastructure. Vertical expansion will be a lesser priority, as management believes this will increase the cost of revenue and thus increase profits at a narrower margin. (Developing more hardware or branching into retail would come with additional payroll, energy, and real estate costs).
With such an ecosystem, MS hopes to maintain a competitive advantage against other tech giants whose product offerings rival that of MS’s portfolio (Google, Amazon, Apple, Tencent).
Growth and Future
As I write this, Microsoft has a market cap of $2.2 trillion, making it the second-highest priced company in the world (with only four others in existence valued into the trillions). It is large cap among the large caps. Such companies face the ceiling of their overall national and even global market. MS has been growing at about a rate of 10% for the last decade, which is impressive for a company so large. The source of its growth will be the continued leveraging of its dominant OS software and its cloud ecosystem to expand into the developing world but also the emergent “Internet of Things” in the developed world. As much as tech has permeated everyday life, new possibilities continue to emerge, and is much growth in tech still to go. MS is well positioned to satisfy this ongoing consumer demand.
Valuation
Now the question is if the cash cow is appropriately priced. At a P/E ratio of 33, this suggests the market is extremely optimistic about its growth, perhaps too much to justify. Average free cash flow the last decade was $27 billion per year, which suggests this company should is fairly valued at $656 billion. Unless MS rapidly finds an enormous source of cash that does not depend on the steady compounding of their ecosystem, MSFT is tremendously overvalued at $2.2 trillion.
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