➡️ 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 understand the company, where the company is going, the competition, and the leadership. This way you can make a more confident investment decision.
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
- Step 1: Tykr Rating
- Step 2: Microsoft Company History
- Step 3: Microsoft Business Model
- Step 4: Microsoft News
- Step 5: Microsoft Competition
- Step 6: Microsoft 4Ms
- Step 7: Is Microsoft stock a good buy?
Step 1: Tykr Rating
➡️ Goal: When you look at a stock, the first step is to look at the financials. Fortunately, Tykr does this for us automatically. 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.
- Summary: Watch
- Score: 78/100
- MOS: 0%
- Share Price: $246
- Fair Value: $265
Step 2: Microsoft Company History
➡️ 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 while Allen went on to Washington State University but dropped out to work at Honeywell.
- In 1975 Popular Electronics magazine featured a MITS Altair 8800 microcomputer. This inspired Allen to come up with the idea of a basic interpreter on the device. Allen worked on the simulator while Gates developed the interpreter. 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.
- In 1980, Microsoft entered the operating system business with its own version of Unix called Xenix which was essentially MS-DOS. This solidified their dominance in the market.
- In 1985 the first version of Microsoft Windows was released.
- In 1986 Microsoft went public.
- 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. This version of windows set a new standard for multitasking computer power.
- 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 they released Xbox.
- In 2008 they entered the cloud server industry by releasing Azure.
- In 2013 they acquired Nokia for $7.2B.
- In 2016 they acquired LinkedIn for $26B.
- In 2018 they acquired GitHub for $7.5B.
- In 2022 they acquired Activision Blizzard for $68B.
Step 3: Microsoft Business Model
How does Microsoft make money?
➡️ 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) and ERP (Enterprise Resource Planning) software. 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
Step 4: Microsoft News
➡️ 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 fool.com states that Microsoft is still a strong company to invest in. The reasons highlighted include intelligent cloud is growing, free cash flow is growing, and they have a prime position in AI.
This article from forbes.com states that Microsoft confirmed a multi-year investment in OpenAI, the company behind ChatGPT. The investment is estimated to be $10B. Microsoft is aiming to turn Azure into an AI supercomputer for the entire world. As quoted by Microsoft CEO Satya Nadella, “In this next phase of our partnership, developers and organizations across industries will have access to the best AI infrastructure, models, and toolchain with Azure to build and run their applications.”
This article from kitco.com talks about Microsoft’s developments within the metaverse. Microsoft will shut down its AR (Augmented Reality) service AltspaceVR which was more focused on consumers and will be transitioning the team to focus on Microsoft Mesh (MM) which is a new platform for collaborations within businesses.
For the latest news on this stock, please login to Tykr.
Step 5: Microsoft Competition
➡️ 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.
Does Microsoft have competition? Within each revenue channel, Yes. But when you look at the entire company and its diversified streams of revenue, there are very few tech companies with this level of diversification.
- 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.
- Summary: Watch
- Score: 67/100
- MOS: 0%
- Share Price: $102
- Fair Value: $103
- Revenue Channels: Retail eCommerce and cloud computing.
- Summary: Watch
- Score: 50/100
- MOS: 0%
- Share Price: $111
- Fair Value: $112
- Revenue Channels: Retail eCommerce, wholesale eCommerce, digital media, cloud computing, and more.
- Summary: On Sale
- Score: 83/100
- MOS: 86%
- Share Price: $99
- Fair Value: $382
- Revenue Channels: Advertising and cloud computing.
- Summary: On Sale
- Score: 61/100
- MOS: 68%
- Share Price: $145
- Fair Value: $331
- Revenue Channels: Hardware and digital subscription services.
Electronic Arts (EA)
- Summary: Watch
- Score: 56/100
- MOS: 0%
- Share Price: $128
- Fair Value: $130
- Revenue Channels: Gaming
Ranking based on Score
- Alphabet (GOOGL) – 83/100
- Microsoft (MSFT) – 78/100
- Amazon (AMZN) – 67/100
- Apple (AAPL) – 61/100
- Electronic Arts (EA) – 56/100
- Alibaba (BABA) – 50/100
Step 6: 4Ms
➡️ 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: A score of 78/100 shows the financials are strong however, the MOS is 0% because the Net Income and EPS have been flat. I’m okay with this because I’ve seen Microsoft bounce back to On Sale in the past due to the Meaning and Moat.
✅ 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.
✅ 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: 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. Microsoft has a Glassdoor rating of 4.4 and CEO approval of 97%. Both are impressive numbers. Satya Nadella is one of my favorite CEOs and I have full confidence he’ll continue making great decisions that generate positive returns for shareholders.
If you’re interested, you may complete your own 4M checklist on this stock or other stocks by logging into Tykr.
Step 7: Is Microsoft stock a good buy?
Microsoft continues to impress me and remains one of my favorite stocks. 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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