To The Moon

Summary

• Microsoft Corporation has been on an upward trajectory, beating analyst expectations 4 quarters in a row;
• The company’s Cloud Computing segment has been the main driver of revenue growth, with Azure being an integral part of that growth;
• MSFT’s gaming expeditions have also been paying off, and with the recent acquisition of Activision, the company is headed to consume a major chunk of the global gaming market;
• Microsoft is also aiming to capture a share in the emerging Metaverse market through the release of AR/VR products;
• I am bullish on the stock, with returns showing as soon as the end of the current year while adding strong potential value to long-term portfolios.

Thesis

Microsoft Corporation (MSFT) has been on the rise for over 2 decades and has historically been famous for its Windows OS and Office suite. Since the launch of Xbox in 2001, it has gradually marked its territory in the global gaming market. It is expected to capture a significant portion of this market after closing its Activision (ATVI) acquisition. The company’s intelligent cloud segment, especially the Azure cloud, has been growing at an impressive rate of almost 50% per quarter. Moreover, the company has been a significant player in the AR/VR market and is likely to be a defining player in the rising Metaverse market. My article focuses on the long-term implications of Microsoft’s strategic moves regarding its growing cloud computing segment and the Activision acquisition.

I expect the company to show solid returns by the end of 2022 and create long-term investor wealth through its forward-looking endeavors.

Microsoft Cloud Computing

Microsoft has outperformed analyst expectations for the previous 4 quarters, and the growth of the intelligent cloud has been an integral part of it. The revenue grew by 32% in Q2 and 36% in Q1 2022, with Azure and other cloud services showing a 46% and 50% growth under the segment in the same periods, respectively. Unfortunately, since Microsoft does not report the exact dollar amount of Azure separately, we can’t produce reliable estimates, nor can we definitively produce comparative reports against other cloud providers such as Amazon Web Services (AWS).

Industry-Specific Clouds

Microsoft has been on a path to introduce industry-specific cloud platforms such as Microsoft Cloud forHealthcare,Manufacturing,Retail, etc. These products and services are specifically tailored towards certain industries and have been the reason for Microsoft acquiring high-value customers such asJohnson and Johnson(JNJ),FedEx(FDX), andCVS Health(CVS). Further, the company recentlyacquired Nuanceto facilitate its Cloud for Healthcare suite by bridging the software’s gap with healthcare facilities. According to the company’s website, Nuance services are used by 77% of hospitals in the United States and 10,000 healthcare organizations worldwide. This integration will bring serious returns to the company’s industry-specific suite portfolio.

Microsoft Azure

Azure has been a significant growth driver for Microsoft’s impressive revenue growth. With the current growth curve,Azure cloud is expected to replace Office productivity softwareas the company’s largest source of revenue in 2022.Gartner estimatesthe global cloud computing market to grow from $332.2 billion in 2021 to $397.5 billion in 2022, andAzure is second only to Amazon Web Services (AWS)with an 18% market share in the global cloud computing market.McKinseyhas illustrated that the cloud segment may reach $1 trillion by 2030 if companies ‘aggressively pursue this cloud opportunity.’

According to a CNBC report, analysts at William Blair estimated Azure revenue to be $7.4 billion in Q2 2021. Based on that, Azure should have estimated revenue of $10.8 billion with a 46% YoY growth in Q2 2022, accounting for almost 60% of the revenue reported by its Intelligent Cloud segment and almost 21% of its total revenue.

Even though the market hasn’t responded well to the slowing growth rate of the company’s intelligent cloud segment after the Q2 earnings release, slowing growth with increasing size and dollar revenues is inevitable. This negative market sentiment is likely to dissipate as the company shows consistent growth metrics in dollar amount and continues this path of product and service diversification.

Activision Acquisition

Microsoft’s acquisition of Activisionhas become a buzz in the world of gaming enthusiasts. The $68.7 billion deal will make history as the biggest all-cash acquisition transaction in the gaming industry. The deal is expected to close by 2023, so there’s still a lot of speculation around it. However, the general sentiment regarding the deal to go throughremains positiveas Microsoft has been time and time again relating the acquisition to its Metaverse endeavor. As Microsoft CEO Satya Nadella said in the same press release, "Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms."

Reuters has reported that Microsoft’s market share in the global gaming market is likely to surge to 10.7% after Activision’s acquisition. As of the end of 2021, the gaming market isvalued at almost $180 billionand is expected to reach almost $200 billion in 2022 and $217 billion by 2023. A 10.7% share of the $217 billion market translates to about $22 billion in Microsoft’s gaming revenue. The company reported over $15 billion in gaming revenue for the fiscal year ended June 30, 2021. Hence, a leap to $22 billion by 2023 shows a CAGR of 21%, which is a reasonable estimate and exhibits great return prospects.

This acquisition hasn’t been the first of its kind by Microsoft, as it acquiredMinecraft creator Mojangin 2015 andBethesda owner ZeniMax Mediain 2021 for hefty considerations for establishing a strong foothold in the gaming market. With over25 million Game Pass subscribers, these business combinations will turn Microsoft into an even more dominating player in the gaming market.

Microsoft, Metaverse, and Mesh

According to Bloomberg, Metaverse will have an estimated market size of about $800 billion by 2024, with the gaming-related segment making a major chunk of it. The metaverse is powered by cloud infrastructure, software tools, platforms, applications, user-generated content, and hardware. All of which is too familiar to Microsoft.Its CEO has expressedthat Metaverse is an integral part of its long-term trajectory. Accordingly, the company has been actively investing in and releasing AR/VR products that are a gateway into the Metaverse long before its ATVI acquisition.

In the words of Satya Nadella, “If you take ‘Halo’ as a game, it is a metaverse. ‘Minecraft’ is a metaverse, and so is ‘Flight Sim. In some sense, they’re 2D today, and the question is: ‘Can you now take that to a fully 3D world?’ And we absolutely plan to do so.”

Microsoft holds an immense customer base composed of corporate clients who use the company’s Office suite like a Mantra. This gives the company a major edge over its competitors when it releases new products functionally integrated with its current software and tools. Clients would prefer sticking to the same vendor rather than looking elsewhere. This creates reasonably promising prospects for the success of the upcoming “Microsoft Mesh.”

Microsoft Mesh is an Azure-based software scheduled for release in the second half of this year. The software will allow people to connect and collaborate as a holographic presence through the HoloLens 2, virtual reality (VR) headsets, smartphones, tablets, or PCs. The company’s ambition of allowing its customers to use Mesh without having any specific piece of equipment makes it extremely appealing as a product. Unfortunately, a lack of any financial information at the moment makes it impossible to assess or estimate its financial implications.

However, the project provides high functionality in this transformational corporate remote world and bridges a gap between the real world and the Metaverse through its AR initiatives. This uniquely positions Microsoft to capture a noticeable chunk of the aforementioned $800 billion market in the future.

Conclusion

Microsoft has always been known as the creator of Windows. Despite the company still owning a significant chunk of the desktop OS market, this sentiment has been changing recently. The company has bolstered its name in the Gaming and Cloud Computing industry through its flagship gaming console, Xbox and Azure Cloud, respectively.

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