Microsoft‘s (MSFT 0.01% ) the stock has generated a total return of over 400% over the past five years, thanks to CEO Satya Nadella’s “mobile first, cloud first†strategy. Under Nadella, who took the helm in 2014, Microsoft has expanded its cloud services, integrated them into Windows 10, launched new mobile apps on iOS and Android, introduced new Surface devices, and expanded its Xbox gaming ecosystem.
These efforts transformed Microsoft, which had often been dismissed as a mature tech company, into an exciting growth company. It has also grown by more than 50% in the past 12 months as it swept aside the trade war, COVID-19 and other macro headwinds. Investors might be reluctant to buy Microsoft shares at these levels, but I think they could rise further until the end of the year, for four simple reasons.
Image source: Microsoft.
1. His business revenue in the cloud is growing
Microsoft’s “commercial cloud†revenue grew 36% to over $ 50 billion, or more than a third of its revenue, in fiscal 2020 (which ended on June 30th). This company includes Office 365, the cloud-based versions of its productivity software; its Dynamics CRM (Customer Relationship Management) platform; and its Azure cloud infrastructure platform.
Azure, which has grown year-over-year revenue at an average rate of nearly 60% over the past four quarters, is the primary growth driver in the segment. Microsoft does not disclose Azure’s exact revenue, but Canalys estimates it controlled 20% of the cloud infrastructure market in Q2 2020, placing it in second place after Amazon (AMZN -0.00% ) 31% share of web services (AWS).
Azure could still have a lot of room to function, for three reasons. First, companies that compete with Amazon, especially retailers, will likely use Azure instead of fueling Amazon’s most profitable business. Second, Microsoft recently beat Amazon to secure the Pentagon’s lucrative $ 10 billion Joint Enterprise Defense Infrastructure (JEDI) contract to upgrade its cloud infrastructure, which could open the door to more government contracts.
Finally, the broader cloud infrastructure market will continue to expand as people use more cloud-based streaming services, applications, and services. Grand View Research estimates that the global cloud computing market could further grow at a compound annual growth rate of 14.9% between 2020 and 2027.
2. Xbox Series S and X are about to launch
Microsoft will launch its next-generation Xbox game consoles, the X and S series, next month. The X series will cost $ 500, while the cheaper, less powerful, fully digital S series will cost $ 300.
Sony‘s (SONY 0.95% ) The PS5 will cost the same as the X Series, but its fully digital PS5 digital edition (which sports the same hardware as its big brother) will cost $ 400. Microsoft’s S series will be less powerful than the PS5 Digital Edition, but the $ 100 difference might win over more casual gamers.
Microsoft also recently bought ZeniMax, which has iconic franchises like Loss, Publication date, Wolfenstein, and Ancient scrolls, for $ 7.5 billion to bolster its game publishing division and counter Sony exclusive games. Microsoft is already bundling games from ZeniMax with its Xbox Game Pass subscription service (which offers unlimited downloads from a library of over 100 games), Xbox Live and Project xCloud with its new “Xbox Game” subscription plan Ultimate Pass “for $ 15 per month.
Image source: Microsoft.
If these aggressive efforts bear fruit, Microsoft’s gaming business, which grew 2 percent to $ 11.6 billion and accounted for 8 percent of its revenue last year, could turn back to. a major growth driver in fiscal 2021.
3. The PC market is still strong
Global PC shipments increased 13% year-on-year in the third quarter and marked the industry’s strongest growth in a decade, according to Canalys. This expansion has been largely attributed to a shift to remote working and e-learning throughout the COVID-19 crisis.
The rise in PC sales will support Microsoft’s Windows business, which generated 16% of its sales last year, as well as its Office and other products business, which generated 25% of its sales. The growth of these two core businesses, along with the strength of its cloud and gaming segments, should offset the impact of the pandemic on its business-oriented activities.
4. Its premium valuation is justified
Wall Street expects Microsoft’s revenue and profits to grow 10% and 12%, respectively, this year. These are stable growth rates, but some investors might falter to the stock’s forward P / E ratio of 33. This valuation isn’t cheap, and its 1% forward dividend yield doesn’t deliver. not much downside protection.
Still, I think Microsoft’s resilience throughout the pandemic, the continued growth of its cloud business, and its upcoming gaming tailwinds all justify this slight premium. In short, investors who rack up stocks today could be sitting on some decent gains next year.
This article represents the opinion of the author, who may disagree with the “official†recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
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