Mi­crosoft’s spec­tac­u­lar run does not mean it has lost steam

Cape Times - - BUSINESS REPORT FOCUS - Frants Preis, CFA, is a port­fo­lio man­ager at VEGA As­set Man­age­ment based in Pre­to­ria. Mi­crosoft shares are held on be­half of clients.

MI­CROSOFT Cor­po­ra­tion is an Amer­i­can multi­na­tional tech­nol­ogy com­pany.

It de­vel­ops, man­u­fac­tures, li­censes, sup­ports and sells com­puter soft­ware, con­sumer elec­tron­ics and per­sonal com­put­ers.

It is best known for Win­dows, Of­fice, In­ter­net Ex­plorer and Xbox. Mi­crosoft’s more no­table ac­qui­si­tions in­clude LinkedIn, Skype and Nokia.

If you bought one share at the com­pany’s ini­tial public of­fer­ing in 1986 for $21 it would be worth $42 624 to­day.

That is a stag­ger­ing 25 per­cent an­nual re­turn over 33 years. Val­ued at over $1.1 (R16.3) tril­lion, it is cur­rently the sec­ond-largest US public com­pany after Ap­ple.

It is com­pa­ra­ble in size to the mar­ket cap­i­tal­i­sa­tion of the en­tire Jo­han­nes­burg Stock Ex­change, which weighs in at R17.2trln.

Com­put­ers of the 1970s were enor­mous and af­ford­able only to large com­pa­nies.

The mar­ket was dom­i­nated by IBM. Bill Gates and Paul Allen founded Mi­crosoft in 1975, while Steve Jobs and Steve Woz­niak estab­lished Ap­ple one year later.

Mi­crosoft ini­tially made most of its money writ­ing soft­ware for Ap­ple.

The com­pa­nies col­lab­o­rated dur­ing the first few years of the Macin­tosh (Mac).

How­ever, when Mi­crosoft launched Win­dows, chal­leng­ing Mac, it re­sulted in ac­ri­mony that would last for years.

That was un­til Ap­ple was on the brink of bank­ruptcy in 1997.

Bill Gates res­cued Ap­ple by agree­ing to in­vest $150 mil­lion in Ap­ple shares.

By 2003 Mi­crosoft had sold back the shares to Ap­ple.

Re­cur­ring rev­enue and prod­uct di­ver­si­fi­ca­tion are Mi­crosoft’s great­est strengths.

Its Of­fice 365 sub­scrip­tion ser­vice, which has more than 200 mil­lion com­mer­cial monthly ac­tive users, is still grow­ing by 25 per­cent each year.

Of­fice en­joys a near mo­nop­oly in of­fice pro­duc­tiv­ity soft­ware and is in­dis­pens­able to many com­pa­nies. It en­sures a sta­ble, re­li­able rev­enue stream for Mi­crosoft.

Mi­crosoft Azure gives busi­nesses ac­cess to ex­cep­tional cloud com­put­ing re­sources.

Com­pa­nies rent Mi­crosoft’s cloud com­put­ing as­sets on an ad hoc ba­sis, as op­posed to build­ing their own data cen­tres.

Azure of­fers cus­tomers cost sav­ings and en­hanced op­er­a­tional flex­i­bil­ity.

The fast-grow­ing cloud com­put­ing in­dus­try is pro­jected to ex­ceed $623bn by 2023; up from $272bn in 2018.

Mi­crosoft is the sec­ond-largest player in this mar­ket and re­cently won a $10 bil­lion 10-year cloud con­tract from the Pen­tagon.

Mi­crosoft’s strong base of prod­ucts and ser­vices will con­tinue gen­er­at­ing growth well into the fu­ture.

If its smart­phones prove suc­cess­ful, it would cre­ate a new growth op­por­tu­nity for the com­pany and could even chip away at Ap­ple’s mar­ket share.

The com­pany’s tran­si­tion to cloud should be rev­enue and earnings ac­cre­tive in the long term.

Some of the $60bn cash on its bal­ance sheet could also be used to ac­quire emerg­ing trend lead­ers in ad­ja­cent or com­pet­ing busi­ness ar­eas.

Mi­crosoft is cur­rently on the ex­pen­sive side com­pared to its earnings mul­ti­ple history.

In­vestors pay a pre­mium for its strong brand, ro­bust bal­ance sheet, re­lent­less prod­uct growth and di­ver­si­fi­ca­tion, as well as its rel­a­tively lower risk com­pared to peers.

In ad­di­tion, Mi­crosoft re­warded share­hold­ers with $33bn in div­i­dends and share re­pur­chases in 2019. Mi­crosoft is a qual­ity long-term in­vest­ment that can gen­er­ate solid re­turns for in­vest­ment port­fo­lios.

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