Microsoft‘s (NASDAQ: MSFT) the stock has generated a total return of over 400% over the last five years, thanks to Satya Nadel’s “first mobile, first cloudy” strategy. Under Nadela, who took over in 2014, Microsoft expanded its cloud services, integrated them into Windows 10, launched new mobile apps for iOS and Android, introduced new Surface devices, and expanded its Xbox gaming ecosystem.
These efforts have turned Microsoft, which has often been dismissed as a mature technology stock, back into an exciting growth reserve. It has also garnered more than 50% in the last 12 months as it eliminated trade war, COVID-1
1. Its commercial cloud revenue is expanding
Microsoft’s “cloud” revenue grew 36% to more than $ 50 billion, more than a third of its top line, in fiscal 2020 (ending June 30). This business includes Office 365, cloud-based versions of its performance software; its CRM (Customer Relationship Management) Dynamics platform; and its Azure cloud infrastructure platform.
Azure, which has grown its annual revenue at an average rate of nearly 60% over the past four quarters, is the main driver of the segment’s growth. Microsoft did not disclose Azure’s exact revenues, but Canalys estimates that it controlled 20% of the cloud infrastructure market in the second quarter of 2020 – placing it second only to Amazon (NASDAQ: AMZN) Web Services (AWS) 31% share.
Azure may still have enough space to run for three reasons. First, companies that compete with Amazon, especially retailers, are likely to use Azure instead of feeding Amazon’s most profitable business. Second, Microsoft recently beat Amazon to secure Jenta’s lucrative $ 10 billion Pentagon joint defense infrastructure contract to upgrade the cloud infrastructure – which could open the door to more government contracts.
Finally, the wider cloud infrastructure market will continue to expand as people use more cloud-based services, applications and streaming services. Grand View Research estimates that the global cloud computing market could still grow at a complex annual growth rate of 14.9% between 2020 and 2027.
2. The Xbox S and X series are about to launch
Microsoft will release its next generation of Xbox, Series X and Series S gaming consoles next month. The Series X will cost $ 500, while the cheaper, less powerful and all-digital Series S will cost $ 300.
Sony‘s 09.30 NYSE: SNE The PS5 will cost the same as the Series X, but its all-digital PS5 Digital Edition (which has the same hardware as its bigger brother) will cost $ 400. Microsoft’s S-Series will be less powerful than the PS5 Digital Edition, but the difference from $ 100 can win over more casual gamers.
Microsoft also recently acquired ZeniMax, which owns iconic franchises such as Doom,, I’m falling out,, Wolfenstein, and The Elder Scrolls, for $ 7.5 billion to strengthen its gaming publishing division and counter Sony’s exclusive games. Microsoft is now combining ZeniMax games with its Xbox Game Pass subscription service (which offers unlimited downloads from a library of more than 100 games), Xbox Live and Project xCloud with its new $ 15 a month Xbox Game Pass Ultimate subscription plan.
If these aggressive efforts bear fruit, Microsoft’s gaming business, which increased revenue by 2% to $ 11.6 billion and accounted for 8% of its highest line last year, could once again become a major driver of growth. in fiscal 2021.
3. The computer market is still strong
Global computer shipments grew 13 percent year-over-year in the third quarter, the strongest growth in the industry in a decade, according to Canalys. This expansion is largely due to the shift to distance work and online learning throughout the COVID-19 crisis.
Rising computer sales will boost Microsoft’s Windows business, which generated 16 percent of its sales last year, as well as its Office and other business, which generated 25 percent of its sales. The growth of these two core businesses, together with the strength of its cloud and gaming segments, must offset the impact of the pandemic on its business-oriented business.
4. The assessment of the premium is justified
Wall Street expects Microsoft’s revenue and profits to grow by 10% and 12% respectively this year. These are stable growth rates, but some investors may withdraw at a P / E ratio of 33. This estimate is not cheap and a 1% dividend yield does not offer much protection.
However, I believe that Microsoft’s resilience during the pandemic, the continued growth of its commercial cloud business, and the upcoming gaming tailwinds justify this slight premium. In short, investors who accumulate shares today may make decent profits next year.