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Microsoft Mantra – Microsoft Corporation (NASDAQ: MSFT)



Investment Mission

Microsoft (NASDAQ: MSFT) is up 18.8% YTD with a market value of $ 915 billion, largely due to positive factors that, according to the author's opinion, are largely priced. While Microsoft retains various hotspots and opportunities, such as LinkedIn performance, current price levels remain elevated.

Wallpaper

Microsoft employs over 100,000 people worldwide and operates in over 100 countries (Microsoft, 2019); It faces significant challenges in many core products or cash cows. In the short term, Microsoft is immune to most economic factors due to its size, cash balance and product portfolio diversity. Microsoft has a market capitalization of around $ 900 billion, up from $ 250 billion in 201

6 (Google Finance, 2019). Historically, MSFT has retained large cash balances on the balance sheet; in Q2 2016, it reported more than NOK 102 billion in cash, cash equivalents or short-term investments (Microsoft, 2016); Now it stands at $ 133.7 billion in October 2018 (Microsoft Annual Report, 2019).

Microsoft Mantra

Microsoft conquered aggressively in the 90s and early 2000s, and again it seems to have found its way back to innovation and dominance. As an outsider looking at, these are the three areas that Microsoft currently seems to excel in:

  • Create great software and distribute it far and far.
  • Vendor size, range and expertise to conquer new markets as they come.
  • SaaS – This subscription-based model provides larger margins compared to traditional options, and is probably the future model for much of Microsoft's cash-purchase portfolio.

Positive Developments

2016 LinkedIn purchases

LinkedIn has a dedicated audience of professionals who are an area Microsoft has strived to succeed in recent years. Working with productivity and assisting professionals to communicate provides an excellent overlap in this particular area, and this echoes an area where synergistic effects can arise as a result of this acquisition (Kelleher, 2016).

Theoretically, it is generally assumed that agreement implementation and integration in M ​​& As is difficult and notoriously difficult to achieve successfully. Microsoft itself has had varying degrees of success in this area, and investors may well remember the repeated write-downs of the smartphone. Terminated by FT as "failed $ 7.2 billion in device purchase from Nokia". Explore other great M & As made by Microsoft, and there's a clear trend with mediocre results. aQuantive and Skype have shown historical uncertainty. A significant change in strategy in relation to historical mergers is that LI continues to run independently, perhaps avoiding problems associated with integrating two companies in the traditional sense.

The author's opinion is an important underlying value of this acquisition newsfeed embedded in LI. Expanding the newsfeed environment to become "go-to" targets for users looking to explore careers, businesses, and the broader industry has the potential to create a market as big as Facebook is for social interactions. If Microsoft can dominate the social space for professionals before Facebook, this may be the only best move the company has made this decade. This is a form for long-term value creation, but one that at best will not succeed in the way mentioned above. It provides a long-term opportunity that probably more than justifies the price paid for LI.

This also loses an important strength in LI, which provides employment and employment services that employers, employees and potential employees find valuable and useful.

This notion is supported in terms of revenue distribution, with talent solutions contributing 65% of revenue in Q3 2016. This area includes all paid services LI provides recruiters and commercial companies that use this to hire additional employees. Premium subscriptions provide 17% of revenue, and this includes, in particular, sales navigator, leading generation service and LI.

  https://i.gyazo.com/a5ef5c5465fc66f565d4a004d0cbfb44.png

(LinkedIn, 2016) Figure 1 [19659019] Until 2018 results and LI reported revenue of $ 5.3 billion, up from $ 2, 3 billion for the whole of 2017, offset somewhat due to the time of the merger that took place at the end of 2016. The annual report indicates income that mainly consists of talent solutions, in all likelihood to a greater extent than the 2016 figure of 65% shown above.

In addition, synergies exist within Microsoft Dynamics, as well as customer relationship management and business relationship management point solutions to integrate and develop suite solutions for professional and business customers. It can be argued that Microsoft is optimistic that LI will act as a lever to consolidate professional profile data across the Microsoft network. This can be further enhanced by building on technology as a personal assistant for Windows, Cortana (Bright, 2019).

LI retains highly experienced computer professionals who can strengthen human capital resources in the broader company. With the twist towards this high growth area of ​​all major technology companies, this is widely regarded as a competitive advantage (Hachman, 2018).

The data collected by LI can also prove very valuable to Microsoft. There is a wide set of data that includes previous hires, interests, qualifications and connections to other users. This may prove helpful as Microsoft continues to build new and innovative solutions aimed at managing customer and business relationships.

An often overlooked implication of this agreement is the acquisition of Lynda.com, a subsidiary of LI. Microsoft has a long history of delivering technical certification and is considered a credible qualification within the respective industries. Microsoft can see this as an opportunity to expand into many other subjects with Lynda. This has the potential that Microsoft can knock and dominate this, albeit less valuable sector of social and educational learning platforms (Foley, 2016).

Microsoft's search engine Bing can also indirectly benefit from integration with the LI platform. This can be realized in Bing which provides the best search for the professional market.

Finally, there seems to be solid preparation for Microsoft and a clear path to realizable synergies.

The author's assessment is the profitability and valuation of LI will likely be based on success in its current growth strategy, or on the success of Microsoft to integrate the free services to add significant added value. This is relatively speculative, and the author considers this acquisition to be and remains of relatively high risk.

Gaming Industry Growth

This segment can usually be split into two parts, the Xbox is still the lead of Microsoft gaming operations, but the acquisition of Minecraft, the introduction of the Windows Store and the long-standing publishing arm, now called Xbox Game Studios gives a sense of the breadth and breadth of Microsoft's operations within this segment.

Total betting revenue in 2018 grew by 14% or $ 1.3 billion in total growth of around $ 10 billion due to strong Xbox software and revenue growth of 20%, mainly based on third-party external titles. a good development. In terms of exposure to the gaming industry via Microsoft, revenue is about 9% of the Group's performance, and this is unlikely to change significantly to the mid-term horizon, again relative to other segments. Therefore, it may be unjustified for investors to use Microsoft as a game in the gaming industry, despite some widespread comments that testify to it.

Moving forward, the Xbox is likely to be in line with expectations, and continues to be on par with the Sony PlayStation equivalent, and the next generation of hardware is unlikely to interfere with the balance that exists today. Access to this can include significant acquisitions of the major gaming companies or a revolutionary new type of format that causes significant change and opportunity for those who are at the forefront. Different technologies have been touted as such, most prominent as VR headsets and more recently Google's Stages. These trends have not been adopted as the rates analysts have predicted earlier, and without new hardware on the horizon, that is, we will continue to see iterative non-revolutionary improvements, the short to medium environment remains relatively stable to Microsoft in the gaming arena. .

Microsoft Office

The continuing trend of moving users from one-time purchases to annual subscriptions through Office 365 provides the catalyst for continued growth in this area. This is especially true for commercial licenses, while consumers have been slower to adapt, and while the rate of change has been lower, cautious optimism has been stable in this SaaS approach so far.

Decisions by the office of non-users remain a core challenge, with additional headwinds in the form of various markets and especially demographics with lower disposable income, which still use unauthorized and pirated Office software on a widespread basis. This has recently been widely tolerated, with former CEO Bill Gates stating that the job today is getting people using Microsoft software and that tomorrow's job is figuring out how to get them to pay for it. the.

From a practical point of view, Office is becoming an increasingly attractive cash cow for Microsoft, as it continues to mature.

Microsoft Windows

The future of Windows is less secure, despite having a market share currently around 4 times that of Apple and this month, 800m MAUs according to Yusuf Mehdi, executive vice president of Microsoft group.

 https://i.gyazo.com/813bedb8027e430ed1de32c198e56569.png ]

(Source: Twitter, 2019 )

But this is largely the result of giving Windows free of charge to a large and significant number of existing users of Microsoft products. At the time of the Windows 10 launch, it was speculated that this would be the latest final version of Windows that the company switched to a subscription model that it had done with Office as described above. Future commercialization strategy for long-term prospects remains unclear, and while Microsoft is likely to have major plans for this flagship line, until this point, they have remained tight in the direction of which direction the group will move forward.

Azure & The Cloud

Possibly sent to this particular party, Microsoft has since the last few years posted in recent years against the frontrunner Amazon (NASDAQ: AMZN). Jeff Bezos, founder of Amazon, commented recently on how, relative to the cloud, the surroundings around it were a miracle. Usually, when a company discovers a highly profitable and scalable process of doing things, in this case cloud technology, it usually takes 12-24 months for competitors to cannibalize that innovation by copying and competing. Bezos felt he had a 7-year start, only with competition as late as 2016-17, and started putting pressure on margins and heads of growth (The Fly, 2018).

Management – Satya Nadella

CEO since 2014 Nadella is credited to Microsoft's cover over the following years. The leading Windows line from a storage of Windows 8 to Windows 10, as mentioned above, became widespread adoption and cemented the OS market position for the company.

The two major acquisitions under Nadella include GitHub and LinkedIn, where the latter has been explored. Similarly, GitHub represents attractive potential and has gone a long way in the open source community in developing a more effective approach to bridging opposing ideologies for open vs. closed software. A developer for many years, Nadella has an insight into how to fix at least some of the frictions between the development communities seen in recent years.

Overall, the author's opinion is that Nadella, overall, is a great CEO of talent and expertise not seen since Gates. The mentioned nature of Nadella to create the future takes some form of vision, and this is shared by many of the prominent technological leaders, both past and present.

Headwinds & Negative Performance

Big Data – Privacy Implications

] Large data and regulatory changes in recent years continue to pose a major headwind to Microsoft's bottom line. No stranger to litigation, Microsoft sent former law firms around the world hoping to minimize legal problems when they arose (The Guardian, 2012). In addition, the relationship between Bill Gates and the US government proved both difficult and costly for Microsoft over the years, with technological veterans too familiar with their monopolistic practices throughout the 90s and into the early years of the millennium. [19659051] The main historical legal case would be "United States v. Microsoft Corp." in 2001 that Microsoft lost, but later abolished largely successfully. This avoided narrowing the company's split into two separate units, but over time, Microsoft's overall market share continued to decline, and the monopoly problem stuck on itself.

Today, the new border is cloud, large data and AI that collects and processes data to provide valuable commercial insights. This is a problem that applies to most large technology companies, the data they retain, helps drive advertising revenue, and others, perhaps fake insights (especially in the political sphere, and how this data allows advertisers to target and manipulate specifically demographics). Although it should be noted that this is less of a problem for Microsoft than it is for those of Facebook and Google, who are basically dependent on these capabilities to control and process data in a commercial manner. Potential regulatory changes provide a significant negative headwind to Microsoft and other sector participants.

Finance

Special Records:

Research and Development:

As the table below illustrates, aggregate R&D expenditure on Microsoft continues to grow modestly while Apple's spending has grown aggressively in recent years. Historically, Microsoft has extensive competition with a significant margin. It is difficult to specifically specify the value of this, but it is a reasonable prerequisite to assuming a significantly higher expense rate in relation to the competitors. It was a competitive advantage that has now largely eroded.

R & D Spend

Apple [19659058] R & D expenses

2015

$ 12bn

2015

$ 8.1bn

2016

$ 12bn

2016

$ 10bn

2017

$ 13bn [19659058] 2017

$ 11.6bn

2018

$ 14.7bn

2018

$ 14.2bn [19659073] (Source: Microsoft & Apple 2018)

Balance

With a net book value of $ 82.7 billion Microsoft on a 9x majority, and its assets provide a return on investment of around 25%. This is considered solid performance, and it should be noted (as with all major technology companies) that traditional profitability measurements only provide a partial image. This is due to the extremely low capex associated with most forms of growth, the production being largely irrelevant to the level of core business being maintained. An example of this may be the incremental cost per user of Bing, which is small compared to the irrelevance (Microsoft, 2018).

Access aside, the balance continues to strengthen with cash and equivalents of 113.76 billion at the end of 2018. This is a potential war breast on a scale that very few companies have access to and is indicative of how significant Microsoft can move Looking ahead about opportunities, they will arise.

Acquisitions and mergers provide an alternative use for cash but are again unlikely because the amount of purchase needed to make a hole in a $ 100bn + stock is quite substantial. Furthermore, share prices are undoubtedly increased in most developed markets which give a deterrent to M & As compared to recent years.

DCF & Valuation

2018

2019

2020

2021

2022

Income

$ 110.36

$ 119.19

$ 128.72

] $ 139.02

$ 150.14

Operating Result

$ 36.47

$ 39.39

$ 42.54

$ 45.95

$ 49.62 [19659061] 19% Tax

$ 19.90 [19659056] $ 7.48

$ 8.08

$ 8.73

$ 9.43

Updated Free Cash

$ 16.57

$ 31.91

$ 34.46

$ 37.22

$ 37.22

] $ 40.19

Discounted cash flow

$ 15.78

$ 28.94

$ 29.77

$ 30.62

$ 31.49

2023

2024

2025

] 2026

2027

2025

2027] Income

$ 162.16

$ 175.13

$ 189.14

$ 204.27

$ 220.61

Operating Result

$ 53.59

$ 57.8 8

$ 62.51

$ 67.51

$ 72.91

19% Tax

$ 10.18

$ 11.00

$ 11.88

$ 12.83

$ 13.85

Actualized Free Cash

$ 43.41

$ 46.88

$ 50.63

$ 54.68

$ 59.06

Discounted Cash Flow

$ 32.39

$ 33.32

$ 34.27

] $ 35.25

$ 36.26

Prerequisites:

Discount rate

5%

Growth rate

8%

Tax rate

19%

10 years present value

19%

10 years present value

$ 308.09bn

(Source: Author and Company Reports, 2019)

First, it is worth noting that the figures in the table above are in billions of dollars. Other assumptions that come into this model include an 8% growth projected based on the past five years of performance, as well as discounting 2018's high tax cost due to recent US tax cuts, leading to large capital inflows back in the United States from abroad. This provides a reasonable basis for projecting in the future, which adds up to about $ 308 billion in value creation over the next decade.

The author's view is this is relatively disappointing, with a market value of around $ 900 billion, adding value to less than Impressive Returns if bought at market prices today.

However, this $ 300bn in value creation may end up turning into a $ 600bn share price increase, but this is far from certain. Capital paid out in dividends, share buy-backs and so on will affect aggregated book values ​​if the company was not engaged in such activities. It is therefore somewhat unreasonable to suggest that this $ 300 billion will be very profitable assets for the company and earn the respective increase in equity values ​​associated with such positive developments, at least for the most part.

To further address growth estimates, it was calculated from past performance and should remain stable based on global trends towards further digitization. The specifications are difficult to identify, but technologies such as AI, Big Data and IoT combined with the historic demand growth of many of the Microsoft's business areas provide the basis for future expectations. As discussed above, cloud technologies continue exponentially and continuing progress in this area is a special catalyst for note.

As for course development expectations, Microsoft is currently on a full-time holiday. As previously discussed, this is the author's opinion because other positive developments are being priced. However, the short to mid-term price expectations continue to be seen by market sentiment, which is likely to be beneficial, short-lived.

Historically, the past decade has been good for Microsoft, as the stock price increases from around $ 20 to $ 120. While the value creation detailed above is conservative, it is unlikely that a similar trend from $ 120 to $ 720 will occur over the next 10 years. Although technological fields go in unpredictable ways, the future is extremely difficult to measure, and therefore most projections have to be taken as just that, projections.

Conclusion

Finally, Microsoft is a good company and has regained both Wall Street's favored share price and vision for the future. Nadella has developed well, perhaps highlighted by the subordinate predecessor Steve Ballmer, who is smaller than the star.

The balance remains strong and growth is expected to continue with current prices ahead. This will probably culminate in affordable but not exceptional performance over the next decade, at least in the author's opinion. Microsoft continues to look expensive in terms of profitability and property base surveys, but this is hardly a revelation, Microsoft has acted beyond its perceived base value for decades.

Microsoft will continue to deliver acceptable performance, but in the author's opinion, it does not look materially over or undervalued. In short, I remain neutral on Microsoft and generally believe that there are better options for investment in other areas.

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Notice: I / We have no posts in any of the aforementioned shares and no plans to start any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.


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