Microsoft Stock: Defining its future with games, the metaverse and the cloud

Thesis statement

For decades, Microsoft Corporation (MSFT) has been a household name thanks to its Windows operating systems and flagship “Xbox” game console. The company quickly jumped into the gaming arena and was the first to leverage gaming with its “Game Pass” subscription model. With the recent acquisition of Activision, the company may well be planning its biggest move into the Metaverse. I’m bullish on the stock because of its continued, forward-looking, long-term strategic moves to build shareholder value and wealth, especially as it relates to the gaming industry, the Metaverse and cloud computing.

A force to be reckoned with in the game

Acquisition of Activision by Microsoft (NASDAQ:ATVI) has become a trending topic online, creating buzz around the company’s ambitions in the games market. The deal, which is expected to close in the second half of 2023, will not only be the video game industry’s largest all-cash acquisition transaction to date, worth approximately $69 billion in enterprise value and $95 per share, eclipsing its previous largest acquisition. , LinkedIn, which was about $26 billion.

Obviously, on a relative scale, the acquisition represents only 3.3% of Microsoft’s total market capitalization of $2.14 trillion, and some would say it’s insignificant. However, MSFT is already a major player in the games industry, and the addition of Activision creates synergies that provide greater operational efficiency and a strategic competitive advantage to capitalize on the untapped metaverse market.

This acquisition highlights the company’s serious ambition in the gaming market. It has steadily increased its market share in the gaming segment over the previous two decades since the launch of Xbox in 2001. Additionally, the company has aggressively expanded its gaming effort since acquiring Mojang, the creator of Minecraft, in 2015. This was followed by the launch of Xbox Game Pass in 2017 and the acquisition of ZeniMax Media, parent company of Bethesda Game Studios, last year.

These investments have captured a sizable chunk of the nearly $180 billion gaming industry, resulting in the gaming component of the business accounting for nearly 11% of total revenue. According to Statista, Microsoft dominates the gaming network market with a whopping 50% market share in the United States. By comparison, Reuters reported a global post-purchase Activision gaming market share of 10.7% for the tech giant.

Microsoft’s Game Pass costs $10 or $15 a month to subscribe per user, and the company has more than 25 million subscribers, translating into an average revenue of $3.75 billion a year. Additionally, mobile gaming hasn’t been one of Microsoft’s strong suits, and Activision’s hold on King/Candy Crush also gives the company a strong entry point into that market.

With the company’s latest acquisition, Microsoft’s market share and increased gaming revenue is poised to grow rapidly with Activision’s additional 400 million monthly active gamers. This will make “Game Pass one of the most compelling and diverse lines of gaming content in the industry,” further bolstering the company’s strong moat.

Entering Metaverse with Mesh & HoloLens 2

Microsoft’s “Mesh” will be released in the first half of 2022. The Azure-powered software will allow users to connect via HoloLens 2, mixed reality (MR) headsets, smartphones, tablets or PCs and collaborate as holographic presence. The Mesh will leverage Microsoft’s desktop customer base, as it will be integrated with Office 365, to be used as a virtual worksharing space as an extension of Microsoft Teams. Over time, Microsoft plans to integrate Mesh into its other applications and generalize Metaverse. Financial information related to Mesh has not been made available, so accurate analysis may take time. Still, the implications of Mesh should resonate throughout the industry.

Quoting Microsoft CEO Satya Nadella,

Gaming is the fastest growing and most exciting entertainment category across all platforms today and will play a key role in the development of metaverse platforms.

He stated the above in the press release of the company’s Activision acquisition agreement, which clearly shows that Microsoft is planning to leverage Activision’s platform to break into the Metaverse. Considering that the concept of Metaverse is still not clearly defined, the precursors, including Microsoft, will be the pioneers of what Metaverse transcends.

The company’s direction and vision are evident, as in an interview with Bloomberg, Satya Nadella said,

If you take ‘Halo’ as a game, it’s a metaverse. “Minecraft” is a metaverse, just like “Flight Sim”. In a sense, they are 2D today, and the question is, “Can you now bring that into a fully 3D world?” And we absolutely intend to do so.

Unsurprisingly, the collaboration with Activision could do just that, as the company’s “World of Warcraft” role-playing game also encompasses a vast virtual world where users appear as avatars and purchase virtual goods such as pets, etc. .

The growing cloud business

Investors pay tribute to the CEO who, since taking office in 2014, has transformed MSFT into a major cloud player. The azure segment is now a core segment and has seen strong growth through 2021, with an impressive 32% year-over-year growth rate. Azure is more than just a cloud service and leverages AI, BI and IoT platforms, which are expected to drive growth in the years to come.

Microsoft’s Q2-2022 revenue of $51.7 billion and EPS of $2.48 once again exceeded analyst estimates of $50.88 billion and $2.31, respectively , posting an annual growth of more than 20%. Revenue generated by the company’s cloud computing segment accounted for more than 35% of total revenue at $18.3 billion, with annual growth of 26%, outpacing overall annual revenue growth. Additionally, revenue from Azure and other cloud services increased by nearly 46% in Q2-2022, 50% in Q1-2022, and 51% in Q4 2021. This signifies significant business growth of the company’s cloud computing and was the cause of the post-earnings rise in the company’s stock.

According to Gartner, the global cloud computing market is expected to grow approximately 19.6% from $332.2 billion in 2021 to $397.5 billion in 2022. McKinsey reported that the cloud computing market is expected to reach $1 trillion by 2030. This strongly supports the future of the business. cloud’s growth and favorable prospects for the next decade.

Microsoft Azure is second only to Amazon.com, Inc. (AMZN) Web Services (AWS), with an 18% market share in the global cloud computing market. However, of course, the numbers don’t really reflect an objective reality since Microsoft does in many areas of cloud computing what AWS doesn’t, for example, its SQL segment offers a lot more services that wouldn’t be taken into account. in the event of a consensus on market shares. Therefore, only comparing the two in areas where the two go together does not give the complete picture. Over ten years, the Azure segment would be the main driver of growth, and as it captures a larger share of overall revenue, operating margins should improve slightly.

Wallstreet analysts remain positive on the stock with a consensus average target price of $372, up nearly 30%. The company’s cloud computing segment plays a major role in these positive sentiments. According to Piper Sandler analyst Brent Bracelin, Microsoft Azure has already surpassed Windows and is now well positioned to overtake Microsoft Office productivity software as the company’s top revenue source in 2022.

Similarly, Bank of America analyst Brad Sills wrote that:

Microsoft is well positioned to deliver sustained low double-digit growth over the next 3-5 years, driven by continued adoption of Azure cloud infrastructure platform, cloud-based Office 365 productivity suite and more profitable revenue for games and game passes on Xbox.

In the wake of the pandemic, the need for cloud computing has rapidly increased. Microsoft already has a large customer base of enterprise customers using its productivity software and data management solutions. As these customers migrate to the cloud, they would prefer to stay with the same provider rather than switch to a new one. Since Microsoft does not release its Azure dollar figures separately, but rather merges them into the total “Intelligent Cloud”, it is difficult to predict the exact effect this might have on the financial statements. However, the sentiment remains positive.

Conclusion

The stock market correction has put one of the best tech names up for sale, and Microsoft remains one of the strongest players in the tech industry, with extensive offerings in multiple areas. My bullish sentiment around the company resonates with the company’s intensive future initiatives, mainly around the growth of the gaming market, the future Metaverse and the accelerated cloud computing market.

Although it is a second in the cloud computing space, Microsoft Azure’s impressive growth metrics in recent quarters have highlighted it as a serious threat to the market leader. Additionally, it remains to be seen how Activision’s recent acquisition will pan out in the long term, but overall sentiment regarding the deal remains promising.