Microsoft Stock Analysis 2025: Future Growth Potential, Valuation Forecast, and Investment Strategy Based on Azure, AI, and Office 365 Ecosystem
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Today, we will conduct an analysis of Microsoft. In this analysis, we will strive to be as direct and concise as possible, avoiding unnecessary content. With that in mind, let us begin.
Table of Contents
Microsoft Business Model
Microsoft's Competition
Microsoft’s Competitive Advantages
What is Microsoft’s Company Direction?
Macroenvironment
Current Financial Growth of Microsoft
Quantitative Analysis of Microsoft
Valuation and Projection of Microsoft
Microsoft Business Model: How Microsoft Makes Money and Dominates the Tech Industry
1. What is Microsoft?
Microsoft is the global leader in operating systems and software programs for PCs and servers. Furthermore, the company is one of the largest technology companies in the world, widely recognized for its cloud services and hardware development. The company was founded by Bill Gates and Paul Allen in 1975.
2. What are Microsoft's revenues?
We can break down Microsoft's revenue into three main sectors, as shown in the following chart: (The chart was created by Silver Font Investments and its team. The copyright belongs to the aforementioned entities. The data has been sourced from external sources unrelated to Silver Font Investments).
The Productivity and Business Processes segment mainly includes the Office 365 suite, which encompasses Excel, Word, Teams, Copilot, etc., and represents 22% of the revenue. This segment also includes LinkedIn, which accounts for 7% of its revenue.
Secondly, the Intelligent Cloud area and its corresponding benefits are primarily represented by Azure.
Finally, we can break down the More Personal Computing segment into the following areas: 9% of the benefits come from Windows licenses, 5% from Bing (mainly advertising), 11% from Xbox consoles and video games, and the remaining percentage comes from device sales.
Although the multinational corporation has a presence worldwide, half of its revenue primarily comes from the United States, accounting for a total of 51% of its revenue.
3. Who is Microsoft's competition?
3.1 Microsoft Competitors in Consoles and Video Games:
After Microsoft's acquisition of Activision Blizzard, the company became one of the largest video game and video console sellers in the world. Its main competitors in the video console market are: Sony, which holds 45% of the market, Nintendo with 27.7% of the market, and finally Microsoft with 27.3%.
While in the video game market, its main competitors are Tencent with 30.9%, Valve with 29% (There are more competitors that have not been included in this analysis as we do not consider them "relevant" since they represent only 4% or less, and Microsoft is also not mentioned as it is not part of the competition, holding a 17.4%).
3.2 Office 365 Competitors:
Its main competitor is Google Drive, which can be a tough competitor.
3.3 Competition of the Windows 11 Operating System:
The only real competitor that can compete with the Windows 11 operating system is Apple. Even so, to this day, Windows still holds a tremendous advantage over Apple. It is also worth noting that apart from Apple, there is currently no other operating system that poses a real and serious threat to Windows.
3.4 Competition in Cloud Services:
As we mentioned earlier, the cloud service offered by Microsoft is Azure. There are thousands of alternatives in the market, but if we focus on the real competitors, we would mainly find Amazon and Google, which in this area, do represent serious competition.
4. What are Microsoft’s Competitive Advantages?
Having explained the main fundamentals of Microsoft, let's now examine if it has competitive advantages. But what are the traits that, if they exist, indicate the presence of a competitive advantage? Well, these are as follows: extraordinarily high profitability, pricing power, differentiation, and, finally, captive customers. Let's see if this company meets these traits and the reasons behind them:
Extraordinary Profitability
It delivers. This is because its gross and net margins are consistently high, thanks to its software and cloud services model, which require low marginal costs.Pricing Power
It delivers. Microsoft has managed to dominate key sectors (Windows, Office, Azure) with prices that it can increase without losing customers due to the dependency on its ecosystem.Differentiation
It delivers. Its integrated ecosystem (Windows, Office, Azure, LinkedIn, GitHub) creates synergies that are difficult to replicate.Captive Customers
It delivers. It’s important to note that businesses and consumers depend on its products to operate, which results in high customer retention and high switching costs. The cost of making a change is too high, either in terms of time or financially.
Let’s now look at the 4 competitive advantages of Pat Dorsey and whether Microsoft meets them or not.
Network Effect = Yes, it applies. The more users that use Windows, Office, and Azure, the more attractive the ecosystem becomes for businesses and developers. LinkedIn and GitHub also reinforce this effect.
Switching Costs = Yes, it applies. Migrating from Microsoft to another platform (e.g., from Windows to Linux or from Azure to AWS) is expensive and complex, which retains customers.
Cost Advantage = Partially applies. Although its products are not the cheapest, its global scale and subscription model (Office 365, Azure) allow it to optimize costs and offer competitive prices.
Intangible Assets = Yes, it applies. Its brand, patents, licenses, and business relationships (government and corporate contracts) give it a value that is difficult to replicate.
Finally, before concluding this section, it is important to keep in mind the threats the company faces. To analyze them, we will use Porter’s Five Forces framework.
Threat of New Entrants = Low. It is important to keep in mind that attempting to create a similar ecosystem requires enormous investments in infrastructure, software, and branding. The barriers to entry (licenses, patents, economies of scale) are very high.
Bargaining Power of Customers = Moderate. Businesses and individual users rely on Microsoft, but alternatives such as Google Workspace or Linux in some sectors can pressure the company to improve prices or services.
Rivalry Among Existing Competitors = High. Microsoft competes with giants such as Google (Google Cloud, Docs), Apple (MacOS, iWork), and Amazon (AWS). Innovation and the competition for dominance in the cloud are intense.
Bargaining Power of Suppliers = Low. Microsoft has a large network of suppliers and sufficient power to negotiate favorable terms, in addition to producing its own software and hardware in some cases.
Threat of Substitutes = Moderate. Although there are alternatives to Windows, Office, and Azure, the integration and familiarity of Microsoft make switching difficult. However, open-source software and cloud computing remain long-term challenges.
What is Microsoft’s Company Direction? Where Is Microsoft Heading and What Are Its Future Goals?
Microsoft's executive team has been led by Satya Nadella, the CEO of the company, since 2014. Despite Nadella's "recent" appointment, he has been with the company since 1992, giving him decades of experience. Since Satya Nadella took on this role, Microsoft has managed to increase its value by 24% annually. Nadella's compensation amounts to $79.11 million, and he holds a 0.012% stake in the company, which is equivalent to approximately $333.9 million.
Bradford Smith holds the position of President and Vice Chairman, with 9.5 years of tenure at the company and a compensation of $23.44 million. Regarding his stake, he owns 0.0062% of the company, which is equivalent to $178.2 million at the time this article is being written.
Amy Hood holds the position of Executive VP & CFO at Microsoft, with 11.8 years of tenure at the company. She has earned a compensation of $25.80 million and currently holds a 0.0056% stake, which amounts to $161.4 million.
Judson Althoff holds the position of Executive VP & Chief Commercial Officer, with a compensation of $23.05 million and a stake of 0.0016%, which equals $45.6 million.
Christopher Young holds the position of Executive Officer, with 4.3 years of tenure and a compensation of $12.03 million. He has a stake of 0.0010%, equivalent to $30.0 million.
Alice Jolla is the Corporate VP & Chief Accounting Officer at Microsoft, with approximately 4.7 years of tenure and a stake of 0.00095%, which equals approximately $27.4 million.
MACROENVIRONMENT.
1.Political Factors.
One of the main risks for Microsoft is political. Why? Well, large tech companies like Microsoft have such immense power that it concerns governments, which is why there is a possibility of these companies being restricted. These limitations could take various forms that would impact the company, such as: Government Regulations, Antitrust Laws, and finally, Taxes.
2.Macroeconomics.
Looking back, we can see that economic crises have not “significantly” affected Microsoft (this is reflected in the company’s profits between 2006 and 2011). Microsoft is also not particularly impacted by inflation, thanks to its strong pricing power.
3.Technological Factors.
This factor may be one of the company's main weaknesses. Due to the rapid pace of change in the technology world, there is a possibility that Microsoft could fall behind technologically. While this may seem unlikely at first, the reality is that tech giants like Nokia, Blackberry, and Kodak once dominated the market before becoming obsolete.
Current Financial Growth of Microsoft: Detailed Analysis of Q2 FY2025 Earnings, Intelligent Cloud Performance, and Strategic Investments in AI through OpenAI
According to sources such as XTB, Microsoft, after publishing its results for the second quarter of the fiscal year 2025, we conclude that the company has achieved solid overall growth, but the Cloud segment has disappointed. Based on the data, we have created the following chart that helps clarify the growth and the current position the company is in. (The chart was created by Silver Font Investments and its team. The copyright belongs to the aforementioned entities. The data has been sourced from external sources unrelated to Silver Font Investments).
How is it possible that the Artificial Intelligence (AI) section has grown so significantly in percentage? Well, the answer may surprise some readers. The truth is that Microsoft owns 49% of OpenAI, the creators of ChatGPT.
Currently, forecasts point to even greater growth potential in the cloud services area, previously mentioned as Intelligent Cloud (Azure). Some sources suggest that this sector is expected to grow by 20% annually.
The following chart illustrates Microsoft’s revenue evolution in the first half of 2024 compared to the same period in 2023. There has been a noticeable increase across all categories, especially in Server products and cloud services, as well as Microsoft 365 Commercial products and cloud services, which remain the main sources of revenue. Other segments such as Gaming and LinkedIn also show increases, reflecting the company’s continuous expansion into various technology markets. (The chart was created by Silver Font Investments and its team. The copyright belongs to the aforementioned entities. The data has been sourced from external sources unrelated to Silver Font Investments).
In conclusion, the revenue sources from Intelligent Cloud + Productivity and Business Process together account for 75% of Microsoft’s total business. These are both very solid areas of the company and still have growth potential. However, we must not forget the last revenue pillar of the company, More Personal Computing, which is the segment with the lowest growth. So, what is behind this? Well, the truth is that the growth of Windows 11 and electronic devices, such as computers, tablets, etc., is highly limited as these sectors are already saturated.
QUANTITATIVE ANALYSIS OF MICROSOFT
According to the data obtained from finviz.com, we can specify that Microsoft has the following data:
What is Microsoft's Net Cash?
Microsoft has a considerable net cash, amounting to a total of 24,000 million dollars (EBIT Cash: 0.2).
What is Microsoft's Net Margin?
Microsoft's net margin is 35%.
What is Microsoft's ROCE?
Microsoft's ROCE is 30%.
What is Microsoft's P/E Ratio?
At the time this article is being written, Microsoft is trading at a P/E ratio of 32.30. This P/E ratio may seem expensive, but in reality, Microsoft's P/E ratio is 27 because the reported earnings do not reflect what the company actually earns or what it could earn in the future. An example of this is the connection between Microsoft and artificial intelligence. As we mentioned in the section "Current Company Growth," Microsoft owns 49% of OpenAI (the creator of ChatGPT). This fact makes Microsoft one of the leading players in artificial intelligence, which also increases its potential for future growth. However, despite OpenAI being valued at $157 billion (valuation at the time this article was written, which may vary), Microsoft reports a loss of $1.848 billion in its income statement from OpenAI.Microsoft makes these adjustments in its accounting to report lower earnings and thus pay fewer taxes. For this reason, the P/E ratio is not 32.30, but rather approximately 27.
What is Microsoft's ROA?
Microsoft's ROA is 18.47%, meaning the company generates a net profit of 18.47 dollars for every 100 dollars in total assets.
What is Microsoft's ROE?
Microsoft's ROE is 34.29%, meaning the multinational generates a net profit of 34.29 dollars for every 100 dollars of invested equity.
What is Microsoft's ROI?
Microsoft's ROI is 23.60%, meaning Microsoft achieves a significant profit. Specifically, for every dollar invested, Microsoft earns a net profit of 0.236 dollars.
Valuation and Projection of Microsoft
Taking into account the potential growth of each business area of Microsoft (mentioned earlier), and reaching the completely subjective conclusion (as this is our personal opinion) that a reasonable P/E ratio for Microsoft is P/E = 25%, combined with our expectation that the EPS in 2029 will be $25, we reach the following conclusion:
Real value of Microsoft in 2029 = 25*25 = $625
Therefore, this gives us an approximate growth potential of 58%, considering the dividend it pays, which is 0.8%, and if it continues with its share buyback rate of 0.6%, Microsoft would provide an approximate annual return of 11%.
In the event that Microsoft’s price drops even further, it would increase the annual return. (We encourage the reader not to rely solely on our calculations and to perform their own. Therefore, we disclaim any responsibility).
Warning: The team of analysts and writers at Silver Font Investments may make mistakes when gathering information or writing it. We are not responsible for any damage that may result from our words. Nothing written here should be considered as investment advice.
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