VALUATION HIGHLIGHTS

1. Intelligent Cloud constitutes 46% of the Trefis price estimate for Microsoft's stock.
2. Productivity And Business Processes constitute 33% 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?

MSFT Stock Performance

MSFT stock has seen strong gains of 95% from levels of $215 in early January 2021 to around $420 now, vs. an increase of about 60% for the S&P 500 over this roughly four-year period.

However, the increase in MSFT stock has been far from consistent. Returns for the stock were 52% in 2021, -28% in 2022, and 58% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that MSFT underperformed the S&P in 2022.

Latest Earnings

For Q1 2025, Microsoft reported $65.6 billion in revenue, up 16% y-o-y. Operating income was $30.6 billion, up 14% y-o-y, and Net income was $24.7 billion, up 11% compared to the prior-year quarter.

The company posted total revenues of $245.1 billion in FY 2024 — up 16% y-o-y.

Note: Microsoft's FY'24 ended on June 30, 2024. Q1 FY'25 refers to the quarter that ended on September 30, 2024.

Microsoft & OpenAI

Microsoft initially invested $1 billion in OpenAI in 2019. Over the recent years, AI has gained huge traction, specifically generative AI, which refers to technologies focused on producing automated text, visual and audio responses. Microsoft's investment in OpenAI is now valued at $13 billion. As more products are being integrated with OpenAI, demand for Microsoft cloud servers is growing.

Recent Important Acquisitions

• Fungible – Microsoft acquired Fungible for $190 million in 2023. Fungible is known for its data processing unit technology to enhance the data center infrastructure capabilities.


• Activision Blizzard – Microsoft acquired Activision Blizzard in 2022 for $69 billion, following a delay caused in securing regulatory approvals. This acquisition granted Microsoft access to one of the most popular games – Call of Duty.


• Metaswitch – Microsoft acquired Metaswitch Networks for $270 million 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 $1.35 billion acquisition of Affirmed Networks in 2020.

Microsoft's Acquisition History page offers the list of all acquisitions made by Microsoft in the last ten years.


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 $150 billion by 2030.
• Productivity and Business Processes Operating Margin: We currently forecast the operating margin to reach 51% by the end of the Trefis forecast period.



Intelligent Cloud Division



• Intelligent Cloud Revenues : We currently forecast Intelligent cloud revenues to grow to over $250 billion by the end of our forecast period. This growth will be driven by the company's increased service offerings on its Azure platform and its server products continue to gain traction due to a change in the mix towards cloud-based services.
• Intelligent Cloud Operating Margin: We currently forecast the operating margin for this division to remain around 46% 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 over $150 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 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. After the COVID-19 pandemic, the work-from-home order has increased the company's cloud services demand. The company is focusing on AI to drive its sales growth. Microsoft has AI data centers in over 60 regions around the world and Azure-OpenAI usage is on the rise.