➡️ This is a step-by-step stock review to determine if Microsoft (MSFT) stock is a good buy. In this article, we’ll help you complete a 4M checklist. The 4Ms include the MOS (Margin of Safety), Meaning, Moat, and Management.
Microsoft is a global technology corporation producing computer software, consumer electronics, personal computers, and related services. The company was founded in 1975, and is headquartered in Redmond, WA.
Table of Contents
- Microsoft Company History
- 4M Summary
- Is Microsoft stock a good buy?
➡️ Goal: It’s important to know the company’s history. This helps us understand the various revenue streams, if they acquired other companies, how they grew through difficult times, and how they separated themselves from the competition.
- Bill Gates and Paul Allen founded Traf-O-Data in 1972 which analyzed automobile traffic data. Gates was 17 years old and Allen was 18 years old.
- Gates went on to Harvard and dropped out after three semesters.
- Allen went on to Washington State University but dropped out after two years.
- In 1975 Popular Electronics Magazine featured a MITS Altair 8800 microcomputer. This inspired Gates and Allen to develop the BASIC language for the Altair computer. They demonstrated their prototype to MITS and the demo worked flawlessly. MITS agreed to distribute this technology and Microsoft was officially founded that same year. Gates and Allen receive $3,000 immediately, with royalties of $30 per copy of 4K BASIC, and $35 for 8K BASIC. Their gross revenue that year was about $1M (equal to $5.6M in 2023).
- In 1980, Microsoft entered the operating system business with its own version of Unix called Xenix which was essentially MS-DOS.
- In 1985 the first version of Microsoft Windows was released.
- In 1986 Microsoft went public and raised $61M.
- In 1987, Microsoft completed its first of 9 stock splits. The most recent was in 2003.
- In 1990, the Microsoft Office Suite was first introduced.
- In 1995, the company releases a flagship operating system called Windows 95. This release propelled Microsoft as a global tech powerhouse. The celebration can be seen here.
- In 2000, Bill Gates handed over the CEO title to Steve Ballmer and Gates created a new title for himself, Chief Software Architect.
- In 2005 Microsoft released Xbox.
- In 2008 Microsoft entered the cloud server industry by releasing Azure.
- In 2013 Microsoft acquired Nokia for $7.2B.
- In 2014 Satya Nadella became the new CEO.
- In 2016 Microsoft acquired LinkedIn for $26B.
- In 2018 Microsoft acquired GitHub for $7.5B.
- In 2022 Microsoft acquired Activision Blizzard for $68B.
➡️ Goal: When you look at a stock, the first step is to look at the financials. Fortunately, Tykr does this step for us automatically. A stock is either classified On Sale (Potential Buy), Watch (Hold), or Overpriced (Potential Sell). The higher the score, the stronger the financials and the safer the investment. The higher the MOS, the higher the potential returns you can make. To determine if a stock is a definitive “Buy” or “Sell”, it’s wise to complete a 4M checklist.
- Summary: Watch
- Score: 78/100
- MOS: 0%
- Share Price: $346
- Fair Value: $265
- Revenue: $198B
➡️ Goal: It’s important to know how a company makes money. A mature business model has multiple streams of revenue which allow the company to weather downturns in the economy
Microsoft generates revenue through the 3 major channels:
Productivity and Business Processes – 32% of revenue
- Office 365 is both a B2C and B2B SaaS. Office 365 includes products such as Word, Excel, Outlook, and PowerPoint, and is used by over 1 million companies worldwide and almost 345 million consumers worldwide.
- LinkedIn generates revenue through paid advertising and premium memberships. There are now over 900 million LinkedIn members in over 200 countries and territories.
- Dynamics 365 is a B2B SaaS CRM (Customer Relationship Management) which is commonly used for customer service and sales. Dynamics 356 is also an ERP (Enterprise Resource Planning) software which is commonly used for supply chain, procurement, accounting, risk management, compliance, and more. This platform can serve SMBs (Small and Mid Sized Businesses) but is most suitable for enterprise customers where contracts can cost hundreds of thousands on up to millions of dollars per year. Some of the companies that use Dynamics 365 include HP, Chevron, Columbia, Siemens, Mercedes-Benz, Ecolab, Maersk, and Chipotle.
Intelligent Cloud – 41% of Revenue
- Azure is a B2B SaaS and the second-largest cloud hosting platform next to AWS. One enterprise customer will sign a contract for Azure and that contract may last 7 – 10 years and cost hundreds of thousands on up to millions of dollars per year. Some of the companies that use Azure include Honeywell, HP, Adobe, Coca-Cola, BMW, Tencent, Uber, Walgreens, Verizon, and more.
- Enterprise services including enterprise support and consulting.
Personal Computing – 27% of Revenue
- Windows Operating system is installed on 79% of computers around the globe. By comparison, macOS is installed on 13%, Chrome OS is 6%, and Linux is 2%.
- Hardware products include the Surface, Surface Duo 2, and Surface Keyboard.
- Xbox has been one of the most popular gaming consoles since the mid-2000s. In 2020, Xbox was the third most popular gaming console based on sales, behind Nintendo Switch and Sony PlayStation. The acquisitions of Activision Blizzard will help increase its video game market share. Microsoft also created Gamepass, which CEO Satya Nadella describes as the “Netflix for video games” which is a subscription service that bundles Xbox live with unlimited access to a catalog of more than 100 games. Today this service has 25 million subscribers.
- Edge is a search engine that is monetized through advertising. About 232 million people around the globe prefer to browse the internet with Edge.
Between 1987 and 2023, Microsoft made over 200 acquisitions. Some of the acquisitions above are more household names but you can review the full list here. This supports the “buy before build” philosophy that most large companies follow. In other words, it’s much wiser to buy a product or another company than to try to build it on your own. This reduces time-to-market and adds an additional stream of revenue or cost savings to the company on day one.
Here are some of the most well-known companies operating under the Microsoft umbrella.
- Activision Blizzard – Video game publisher
- Ally.io – Productivity Software
- TakeLessons – Education software
- RiskIQ – Cybersecurity
- Smash.gg – Esports
- CyberX – Cybersecurity
- Affirmed Networks – 5G networking
- Movere – Cloud migration
- Github – Software development tools
- Hexadite – Cybersecurity
➡️ Goal: It’s important to understand who the competitors are and how their financials rank against this company. Try to find 5 other competitors to rank against based on Score. The best way to find competitors is to Google “XYZ competition” and replace XYZ with the company name. You can also go to Tykr and click on the “Similar Stocks” tab on each stock to see similar companies in the same industry.
- Summary: Watch
- Score: 78/100
- MOS: 41%
- Share Price: $248
- Fair Value: $391
- Revenue Channels: Cloud computing, advertising, B2C SaaS, B2B SaaS, hardware, and gaming.
Top 5 Competitors of Microsoft
- Summary: Overpriced
- Score: 39/100
- MOS: 0%
- Share Price: $125
- Fair Value: $100
- Revenue Channels: Retail eCommerce and cloud computing.
- Summary: Watch
- Score: 50/100
- MOS: 0%
- Share Price: $92
- Fair Value: $104
- Revenue Channels: Retail eCommerce, wholesale eCommerce, digital media, cloud computing, and more.
- Summary: Watch
- Score: 44/100
- MOS: 61%
- Share Price: $123
- Fair Value: $194
- Revenue Channels: Advertising and cloud computing.
- Summary: On Sale
- Score: 61/100
- MOS: 75%
- Share Price: $184
- Fair Value: $398
- Revenue Channels: Hardware and digital subscription services.
Electronic Arts (EA)
- Summary: Watch
- Score: 61/100
- MOS: 0%
- Share Price: $128
- Fair Value: $113
- Revenue Channels: Gaming
➡️ Goal: It’s important to understand who the CEO is, what they have accomplished in the past, and how they have helped this company grow. As investors, we should invest in CEOs with humility and integrity. Good leaders typically have stronger cultures, less turnover, and better returns in the stock market.
When Microsoft was interviewing for the new CEO in 2013, they asked each candidate why they are the best choice for CEO. Each candidate explained why they are the best except for one individual. In this circumstance, this particular individual turned a question back to the interviewers and asked “Do you want me to be CEO?” This question was asked by Satya Nadella, who became CEO of Microsoft in 2014. I’m paraphrasing this story from a video but the point is, Satya didn’t try selling himself. The lesson learned here is sometimes we don’t need to sell. Our past actions should sell themselves and we shouldn’t have to explain those actions if the results carry any merit. Since he’s taken the reigns as CEO, some of the improvements he’s directed include releasing Microsoft Office on Apple’s iPad, releasing Microsoft Outlook apps on iPhone and Android, introducing the company’s first laptop (Microsoft Surface), and driving the acquisition of Activision Blizzard.
Glassdoor Company Rating: 4.3
Glassdoor CEO Approval: 94%
➡️ Goal: It’s important to highlight important company-specific news as well as industry-specific news over the last month and year. We don’t need daily news on a company to make buy or sell decisions because we’re investors, not traders. Overall, we want sufficient news to understand where a company and industry are heading over the next year or few years.
This article from cnbc.com highlights the latest earnings report.
Shares jumped by 6% in one day following the good news. Let’s look at the key drivers.
- The EPS estimate was $2.65 and the reported was $2.99.
- The revenue estimate was $54.50 billion and the reported was $56.52 billion.
- Revenue increased by 13% from Q3 last year.
- Net income increased by 27% from Q3 last year.
- Microsoft’s intelligent cloud (Azure) increased by 19%.
- Azure revenue increased by 29%.
- Azure OpenAI now has 18,000 customers up from 11,000 in July.
- Productivity and business segment (Office, LinkedIn, Dynamics) increased by 13%.
- Windows operating system revenues increased by 4%.
- Earlier this month, Microsoft completed its $68.7 billion acquisition of video game publisher Activision Blizzard. While Activision isn’t incorporated into Microsoft’s fiscal first-quarter results, it will partly affect earnings for the next quarter.
➡️ Goal: All of our homework on this company leads up to the 4M checklist. A lot of investors only look at the numbers. Yes, it’s important to look at the first M (MOS) which is the math part of investing but it’s also important to look past the numbers and also look at the business, the competition, and the management. If all 4Ms pass, we should have high confidence in buying this stock.
✅ MOS: Although Microsoft is Watch in Tykr, the Score is 78/100 which shows the financials are strong. The current MOS is 0% because the quarter-over-quarter EPS is relatively flat. Ideally, we want to see that EPS increase which will reflect a higher MOS.
✅ Meaning: Microsoft has one of the most impressive business models in the stock market. The company has a strong balance between B2C and B2B SaaS, cloud computing, advertising, gaming, and an operating system. Most well-established companies don’t have the range or revenue streams that Microsoft has. Microsoft also owns several other companies including Activision Blizzard, Nuance Communications, CyberX, Affirmed Networks, and Github. This makes Microsoft a very hard company to compete with. I’m also excited to see how Copilot will make an impact on Azure and Office 365.
✅ Moat: Yes there are competitors in each industry but together as a whole, Microsoft stands apart. The only other company that has as many revenue streams as Microsoft is Google’s parent, Alphabet.
✅ Management: Satya Nadella has done a great job leading this company. He’s an innovative CEO with good leadership skills, a calm demeanor, and a strong sense of humility. These are the characteristics we like to see in a CEO.
Microsoft continues to impress me and remains one of my favorite stocks. All 4Ms checkout with flying colors. I will continue buying more shares of Microsoft as often as I can.
The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.
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