Summary
- Microsoft doesn’t face the same antitrust concerns as other large technology companies after working its way through lawsuits.
- The company has been able to grow behind the scenes with numerous small acquisitions, and more rumored.
- Microsoft is becoming a technology conglomerate with growing businesses able to generate strong FCF and shareholder returns.
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Microsoft definitely isn’t an under-the-radar company. However, under the radar, the company has been changing. Microsoft, having gone through its antitrust hearings in the late-90s, when its market position was stronger than today, has escaped most of the recent anti-trust scrutiny on other large tech companies.
As a result, the company has been able to undergo recent acquisitions, and with rumors of a potential Discord acquisition, after its $7.5 billion Bethesda acquisition, as we’ll see throughout this article, the company has strong long-term shareholder returns.
Microsoft 2Q Financial Results
Microsoft has managed to generate strong 2Q 2020 financial results highlighting continued growth.
Microsoft FY21 Q2 Results – Microsoft Investor Presentation
Microsoft managed to earn $43.1 billion in revenue from the quarter across its impressive portfolio of businesses. This included the company’s productivity and business processes along with its intelligent cloud and personal computing businesses. The company’s gross margin generated a 67% percentage resulting in $28.9 billion in gross margin.
The company’s revenue managed to grow 17% YoY and the company, in its established businesses, managed to grow its gross margin by 1% resulting in 18% YoY growth. The true excitement comes from the company’s operating income and net income. The company earned $17.9 billion in operating income, or 42% with 4% YoY margin growth with 29% YoY growth.
At the end of the day, the company’s quarterly net income was $15.5 billion. That gives the company a P/E of ~30. That’s a bit higher than “cheap” but it’s net income that’s growing 33% YoY as the company’s businesses and its margins have grown significantly. The company’s financial performance through the quarter was incredibly impressive.
Microsoft Financial Rewards
The company’s commercial financials and ability to reward shareholders are worth looking at here post its financial results.
Microsoft Commercial Business Growth – Microsoft Investor Presentation
Microsoft managed to grow its commercial bookings with 19% GAAP growth YoY for the quarter. The company’s remaining performance obligations are $112 billion, significant in relation to the company’s $43 billion in quarterly revenue supporting continued growth. The company’s cloud business has separately earned incredibly strong revenue ($16.7 billion).
Azure’s massive growth and increased market share, along with its growing popularity, is making the business massive and impressive in its own right.
Microsoft Cash Returned – Microsoft Investor Presentation
Microsoft managed to return $10 billion to shareholders in 2Q 2020 versus its $15.5 billion in quarterly net income. This included $4.2 billion in dividends (0.92% yield) and $5.8 billion in share repurchases for a ~2% yield here. The company’s operating expenditures have remained significant with a low tax rate, but it has continued to perform.
More so, the company has continued to invest heavily in its business, with $5.4 billion in capital expenditures including financing leases. The company’s cash flow here, the true cash hitting the bank, was impressive. The company earned $12.5 billion in cash from operations, and $8.3 billion in FCF. That means annual FCF of more than $33 billion.
That’s the FCF to continue generating shareholder rewards.
Microsoft Growth Potential
Microsoft’s individual businesses have significant growth potential, as seen by the company’s recent 33% YoY growth.
Microsoft Productivity and Business – Microsoft Investor presentation
Microsoft has seen continued growth in its commercial products and cloud services revenue with GAAP 11% growth YoY. The company’s Office 365 product seat growth has been impressive and the company’s Microsoft 365 consumer business has 47.5 million subscribers. From 37.2 million subscribers a year ago, this growth is massive.
More so, it’s such a small % of the overall market, the company has significant additional growth potential. The company’s LinkedIn revenue growth, a unique social network, has also seen 23% YoY growth. LinkedIn is rapidly becoming a large social network with ~750 million active users and strong lead generation abilities helping ads.
Microsoft Intelligent Cloud – Microsoft Investor Presentation
Microsoft’s intelligent cloud business has also seen 26% YoY growth. The company’s Azure business has seen much higher growth at ~50%. The company has seen consistent revenue growth here, and operating income, combined with strong margins, has managed to grow even faster for shareholders.
AWS earns $12.5 billion quarterly revenue and Azure is just over half the size. Azure integrates well into Microsoft’s overall business and will likely continue. This will be a business from Microsoft that’ll likely continue to grow at the double digits going forward. That’ll help the company generate stronger operating income and much higher shareholder returns.
Microsoft Personal Computing – Microsoft Investor Presentation
The last of Microsoft’s business is its personal computing business. The company’s Windows OEM Pro business has seen revenue decline, while its non-Pro revenue has grown to help make it up. The company’s Surface business has bounced back and forth while even its service advertising revenue bounced up slightly.
The company’s Xbox content and services revenue has seen stronger growth of almost 40%. The company’s Bing business has struggled, however, its gaming businesses through Bethesda (and maybe Discord) has seen stronger growth. However, this is definitely a part of the company’s business that’s been flatlining.
Overall, these businesses will continue to have strong margins and cash flow growth, which is worth paying close attention to. More importantly, we expect Microsoft to continue growing for the long run, which, combined with its already strong net income, means the potential for long-term substantial shareholder rewards.
If the company continues growing at its current growth rate for ~2-3 years, it’ll reach a P/E ratio of just 15 which’ll help the company generate strong long-term returns for those who invest now. The company’s businesses here have lots of room for growth.
Microsoft Risk
Microsoft’s risk is that it operates in competitive businesses with capitally intensive competitors spending a significant amount of money. There’s no guarantee it’ll be able to continue operating and growing well. As much as it’s working to steal AWS’s lunch, AWS is working to steal Azure’s lunch back. This continued investment has performed well for Microsoft so far, but there’s no guarantee it’ll continue to payoff.
Conclusion
Microsoft has an impressive portfolio of assets and it’s continued to grow massively. The company has more than $60 billion in net income giving the company a P/E of ~30. Assuming continued growth for the company, it’ll be able to continue generating strong shareholder returns and decreasing its overall valuation.
Microsoft has numerous different growth levers and it’s been able to make opportunistic acquisitions as a result of a lack of antitrust proceedings. We expect the company to continue making opportunistic acquisitions here supporting long-term growth. The company’s growth here, with growing margins, has the ability to generate strong returns.
Overall, as a result of these things, we recommend investing in Microsoft for the long run.