Moving to the cloud has dealt with Microsoft (MSFT 1.09%) Well, and while the ubiquity of its software means it’s still a force to be reckoned with in personal computers, there’s now so much more to this tech giant, and arguably, that’s much more important.
Still, even though Microsoft has been torn — and not just over the past year, but over the past five years, really — there’s good reason to keep in mind that there’s still a downside risk for a security. So while there are some well-worn caveats about the company and its actions, we asked three Motley Fool contributors to each share a bear case for Microsoft that you might not have thought of.
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The cloud may not be as profitable as you think
Tim Green (Cloud Infrastructure Commodization): Microsoft, with Amazon (AMZN 2.47%), AlphabetGoogle, and others, are pouring money into building massive cloud data centers. Gartner expects the infrastructure-as-a-service market, currently led by Amazon, to grow nearly 37% this year, to $34.6 billion.
Cloud computing is more complicated than simple IaaS, where virtual servers and storage are rented. Platform as a service provides an environment for developing applications without having to manage the underlying infrastructure, and different cloud platforms offer differentiated sets of tools and features. But IaaS is essentially a commodity. An Amazon virtual server is essentially the same as a Microsoft virtual server. 100 GB of cloud storage from Amazon is equivalent to 100 GB of cloud storage from Microsoft.
The demand for IaaS is growing so rapidly that major vendors are able to generate impressive profits. Amazon’s AWS managed a segment operating margin of 25% in 2016, for example. But as the market matures, the competition will become fiercer, which means even more aggressive price cutting than what we’ve already seen. This market will ultimately be driven by supply and demand, and once demand no longer outstrips supply, it’s hard to imagine these high profit margins continuing.
For Microsoft, that means that at least some of the billions it invests in its cloud business could end up delivering mediocre returns, far below those of its traditional software business. Investors may not take this risk into account.
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A disruptive new game model
Steve Symington (The rise of “console-free” gaming): It’s tempting to call sonyThe PlayStation 4 is the biggest threat to Microsoft’s gaming business. After all, Sony increased the number of PS4 units sold by 15.5% year over year last quarter, to 9.7 million. Meanwhile, Microsoft games revenue was down 3% (down 1% at constant currency), as lower Xbox console sales were only partially offset by software revenue growth and Xbox services.
However, I believe an even greater threat to both systems looms with the impending rise of non-console gaming. Take Nvidiait is (NVDA 1.79%) The on-demand GRID Gaming as a Service (GaaS) solution, for example, which NVIDIA can boast of, allows gamers to “break free from the console” with high-quality, low-latency games on any PC. , Mac, smartphone, tablet or TV. All you will need is a high-speed internet connection. And because GRID renders games on NVIDIA’s cloud servers, then encodes each frame and streams it to the device, gamers won’t need to upgrade their local hardware, won’t need physical discs, and won’t even need to download or install the games they want to play.
To be fair, Microsoft is certainly capable of launching a game streaming service like this through its Azure cloud computing platform. In fact, some gamers have already set up Azure instances to stream their favorite AAA game titles, ironically taking advantage of Azure’s access to NVIDIA’s powerful M60 GPUs in the process. If Microsoft went that route, however, it would lose the lucrative revenue stream it currently enjoys selling Xbox game console hardware.
At the same time, if it insists on sticking with its current console-centric model – something that seems likely given its development of the next-gen Project Scorpio console – Microsoft could be put in a difficult position. to catch up as console-free gaming takes off in the years to come.
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Pay now and pay later
Rich Duprey (More assets declining in value): In the grand scheme of things, Microsoft’s acquisition of LinkedIn for $26 billion last year, while not a mere change, won’t break the tech giant’s bank. , but it serves to emphasize what it does well and what it does poorly – and therein comes some risk for the future.
As a positive development, this confirms Microsoft’s commitment to the enterprise sector and the potential link between the social media platform, its Office suite of products, its CRM Dynamics software application and the machine learning capabilities of Microsoft. ‘Azure. CEO Satya Nadella said so a year ago, when announcing the deal, when he described an “information-rich graph” that would form by connecting the dots between the 433 million users. from LinkedIn, the 1.2 billion people using Office products, and the 300 million devices running Windows 10. Hopefully all the math turns out to be helpful.
However, Microsoft does not have an enviable track record when it comes to acquisitions. For example, he ended up writing off more impairments and restructuring costs than the $9.4 billion he paid for Nokia. He also forfeited much of the $6.3 billion purchase price from his 2007 acquisition of aQuantive, and it’s hard to say what he gained from the $8.5 billion spent on Skype, or the $1.2 billion paid for its other foray into enterprise social. networking, Yammer.
LinkedIn’s user growth was slowing before the purchase, and now that it’s been integrated into Microsoft, we’re not getting those numbers anymore. But the idea that another declining asset has been added to the portfolio is hard to shake.
In the first full quarter the platform was part of Microsoft, it added $228 million in revenue, but suffered a loss of $100 million in net income. Time will tell if this was a smart move, and most investors seem willing to be patient to see how it works out, but the tech leader’s willingness to splash big bucks on companies that don’t do not materialize and which often cost more. ultimately, is a risk that investors need to consider.
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