Microsoft overtook Apple to be the world's most valuable listed company by market capitalisation recently. We find out what is driving positive sentiment on the stock.
Microsoft is now king of the stock market, after becoming the world’s most valuable publicly traded company at the market close on 13 January 2024.
Its market capitalisation reached US$ 2.9 trillion, exceeding Apple’s market capitalisation of US$ 2.80 trillion.
Over the past 1 year, Microsoft’s share price has gained more than 66%.
Let us find out why Microsoft has been well liked by investors, and if the rally can be sustained.
What investors may like about Microsoft
#1 Leader in operating system (OS) and productivity software
Microsoft is the dominant leader in the personal computer (PC) and notebook operating system (OS) space, with a market share of about 69%.
Any purchase of a notebook and PC would also result in the consumers using their productivity software such as Microsoft Word and Microsoft Excel.
This reinforces the dominant ecosystem that Microsoft has created.
Windows remains a stable cash cow business for Microsoft despite the stiff competition from Apple’s Macbook as well as Google’s Google Sheet, Google Slides.
Windows still accounts for about 26% of Microsoft total revenue and commands a decent 30% operating margin.
#2 Microsoft Windows 12 might trigger replacement cycle
Microsoft typically introduces a new Windows version with new functionality every few years, similar to what Apple does with its iPhone OS.
Windows 12, the latest Window version, is likely to be launched in June 2024.
This may help to kickstart some replacement demand, as consumers and enterprises may accelerate their decision to upgrade to newer PCs.
#3 Software subscription revenue model driving growth
Microsoft has come a long way from just offering the Windows OS and other software like Microsoft Office.
It has implemented a subscription model for its portfolio of productivity and communication software such as Office Commercial, Office Consumer (consisting of products such as Microsoft 365, Teams, etc) as well as solutions such as Power Apps, EPR cloud applications.
The Productivity and Business Processes segment now accounts for 33% of Microsoft’s total revenue and commands a high operating margin of 49%.
Within this segment, the number of subscribers in Consumer Office grew by 12% compared to the previous year to reach 67 million users.
In the meantime, revenue in Commercial Office grew by 10% in 2023, supported by both an increase in small and medium business users, as well as higher revenue per user.
An increase in commercial and enterprise users of Office 365 could continue to drive growth in this segment.
#4 At the forefront of AI
Microsoft’s involvement in artificial intelligence (AI) first came into the spotlight when Microsoft announced a $10 billion investment into OpenAI in January 2023.
There has been significant growth in the AI industry since then, with AI being the buzzword for most of 2023.
However, it might be worth noting that Microsoft’s involvement in the AI segment started way before 2023, when it invested U$1 billion into OpenAI in 2019.
Microsoft also developed Cortana, a virtual assistant which could be integrated into Microsoft’s Bing search engine.
With the partnership with OpenAI, Microsoft has since launched Copilot, which will be integrated with Microsoft 365.
Copilot uses large language model (LLM) to provide coding assistance, workflow optimisation, and suggestions on content generation, with an aim of improving productivity.
#5 Cloud business now the largest segment and fastest growing
The Intelligent Cloud segment, which consists of server products and cloud services such as Azure , SQL Server, is the largest segment for Microsoft now.
Intelligent Cloud now accounts for 42% of Microsoft’s revenue. It also generates a high operating margin of 43%.
In fact, Intelligent Cloud is also Microsoft’s fastest growing segment, with revenue growing at +17% in 2023.
Microsoft’s growth in Intelligent Cloud comes at the back of an explosion in data usage which rely on cloud platform services such as Azure.
What would Beansprout do?
Microsoft has successfully pivoted its business from a provider of Windows OS to a fast-growing company built upon its cloud server business.
It has further entrenched its leadership position in the technology world with its investment into AI applications, adding to its suite of product offerings.
This should put Microsoft in a strong position to benefit from structural technological trends over the medium to long term.
According to data shown in the Webull app, 91% of analysts have a Buy rating on Microsoft with an average share price target of $412.71 as of 12 January 2024.
This would be 6.2% above its share price of $388.47 as of 12 January 2024.
We would be looking out for how Microsoft would make use of its investments into AI to drive further growth across its businesses.
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