VALUATION HIGHLIGHTS

1. Intelligent Cloud constitutes 43% of the Trefis price estimate for Microsoft's stock.
2. Productivity And Business Processes constitute 37% of the Trefis price estimate for Microsoft's stock.
3. More Personal Computing constitutes 18% of the Trefis price estimate for Microsoft's stock.

WHAT HAS CHANGED?

Latest Earnings

For Q2 2024, Microsoft reported $62 billion in revenue, up 18% y-o-y. Operating income was $27 billion, up 33% y-o-y, and Net income was $21.9 billion, up 33% compared to the previous year.

Further, the company posted total revenues of $211.9 billion in FY 2023 -- up 7% y-o-y.

Note: Microsoft's FY'23 ended on June 30, 2023. Q2 FY'24 refers to the quarter that ended on December 31, 2023.

Impact of Coronavirus

IT software and Services industries suffered from a fall in demand for software and web services at the start of the pandemic as consumers focused solely on essentials, not discretionary products. However, it recovered over the subsequent quarters, with companies having a portfolio of software and services aimed at remote collaboration benefitting the most. Notably, Microsoft witnessed an 18% jump in its revenues in FY2021 and FY2022. That said, the growth slowed down in FY2023 due to the tough macroeconomic conditions. We expect the same trend to continue in the subsequent quarters.

Microsoft acquires Metaswitch Networks

Microsoft announced a definitive agreement to acquire Metaswitch Networks to expand its approach to empower operators, partner with network equipment providers, and deliver on the promise of 5G. The acquisition builds on the company's recent acquisition of Affirmed Networks, which closed on April 23, 2020. The convergence of cloud and communication networks is expected to present a unique opportunity for Microsoft to serve operators globally via continued investment in Azure.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Microsoft's value that present opportunities for upside or downside to the current Trefis price estimate for Microsoft:

Productivity And Business Processes

• Productivity And Business Processes revenues: We currently forecast Microsoft's revenues from Productivity and business software will increase to over $115 billion by 2030.
• Productivity and Business processes Operating Margin: We currently forecast the operating margin to reach 50% by the end of the Trefis forecast period.

Intelligent Cloud Division

• Intelligent Cloud Revenues : We currently forecast Intelligent cloud revenues will grow to $159 billion by the end of our forecast period as the company continues to offer more services on its Azure platform and its Server offering continue to gain traction due to change in mix towards cloud-based services.
• Intelligent Cloud Operating Margin: We currently forecast the operating margin for this division to remain around 42% by the end of the Trefis forecast period.

More Personal Computing

• Microsoft's more personal computing revenues: We currently forecast Microsoft's more computing revenues to grow to $89 billion by the end of the Trefis forecast period.


• Personal Computing Operating Margin: We currently forecast the operating margin to remain around 30% by the end of the Trefis forecast period.

BUSINESS SUMMARY

Microsoft makes money primarily through the sale of software server licenses, business productivity, and operating system software. Microsoft's business productivity software suite, MS Office, is used for word processing, spreadsheet preparation, presentations, and email. MS Office is sold primarily to businesses worldwide. Microsoft's operating system software, known as Windows, is sold primarily to PC manufacturers (such as Dell, HP, and Acer), which sell Windows-based PCs to consumers and businesses. Its Server software includes MS SQL and Windows servers sold to application development companies.

SOURCES OF VALUE

We believe Productivity services and Intelligent cloud are the most valuable segments of Microsoft for the following reasons:

MS Office Has High Market Share

Microsoft Office has a higher market share in the productivity market compared to the market share Windows OS has in the PC market. Even if users use Mac OS X over Windows OS for their personal computing needs, Microsoft's Office Suite is still one of the best available productivity suites on the platform. Even as more competition enters the productivity software industry, we still think that Office is substantially better than competing products.

Popularity of Azure Platform, Windows, and SQL Server

Due to the increase in Internet penetration, and business activity on the Internet, big data analytics has come to the fore. As a result, the popularity of cloud services (IaaS, PaaS) and SQL servers is rising. Furthermore, Microsoft's Azure platform has increased sales of its virtualized version of its Windows server. Due to the covid pandemic, the work-from-home order has increased the company's cloud services demand.