Microsoft (MSFT)

Cloud platform firing on all cylinders



Wealth Idea - Microsoft (MSFT US) 070422
.pdf
Download PDF • 285KB

INVESTMENT HIGHLIGHTS


Can a purchase of Microsoft shares at 30x earnings be justified? Yes. All of Microsoft’s business segments are going to show strong revenue growth in 2022, with the company’s intelligent cloud business segment leading the way. Revenue from the cloud segment, which is now Microsoft’s biggest business area, is expected to grow more than 20% in each of the next two years.


On March 11, Microsoft shares corrected to $278, or 27x 1-year forward earnings. With the war in Ukraine likely to drag on, and the Fed becoming increasingly hawkish, we think investors might see that level again, where we believe Microsoft shares truly represent growth at a reasonable price.


ESSENTIALS 


The cloud business is Microsoft’s biggest and fastest-growing source of revenue, accounting for 35.4% of its top line in 2QFY2022. The segment grew above 20% YoY in FY2020-FY2021 each year. Analysts have forecast 20%+ growth in this segment for each year in FY2022-2025. 


COVID-19 accelerated the digital shift among companies to cloud-delivered information technology. Many enterprises decided that they could outsource their technology infrastructure during COVID-19 for cost rationalization, improve IT capabilities, and more up-to-date technology by partnering with a cloud provider. 


Revenue from Microsoft’s Azure cloud platform grew 46% YoY last quarter. Bookings were strong and Microsoft guided Azure revenue growth to accelerate in the March quarter.


The old Microsoft can be found in the Productivity and Business Processes segment. However, a couple of relatively new businesses, Linkedin and Microsoft Teams, can be found mixed in with stalwarts such as the Windows operating system. 


According to the latest “Microsoft’s Annual Work Trend Index Report,” the average user’s weekly time spent in Team meetings has increased by 252% since Feb 2020. Rising security breaches in Microsoft’s on-premise Exchange servers could propel the demand for cloud-based productivity suites such as Microsoft 365 to grow by double digits over the next 12 months 


The More Personal Computing segment includes devices such as the Surface and Xbox. Analysts expect the maker of Xbox consoles (Series X) to hit annual shipments of 37 million units in 2024, a 3-fold increase over 2021’s estimated shipments of 12 million units. 


If Microsoft is successful in its acquisition of Activision Blizzard, it will gain a dominant position in gaming hardware and content. With ATVI, Microsoft can accelerate the growth of its gaming segment across multiple devices beyond Xbox, such as PCs, mobile devices, other consoles, and the cloud. It will also gain access to well-known game titles such as Call of Duty, World of Warcraft, and Candy Crush. 


Analysts are forecasting that the ATVI deal could add about US$10b in revenue and 53 cents in adjusted EPS to Microsoft’s in 2023. However, the deal will depend on when the antitrust agencies would complete their scrutiny of the deal. Analysts are expecting the ATVI acquisition to go past, however, investors need to sit out for at least a year.