OPINION: Microsoft's spectacular run does not mean it has lost steam
It develops, manufactures, licenses, supports and sells computer software, consumer electronics and personal computers.
It is best known for Windows, Office, Internet Explorer and Xbox. Microsoft’s more notable acquisitions include LinkedIn, Skype and Nokia.
If you bought one share at the company's initial public offering in 1986 for $21 it would be worth $42624 today.
That is a staggering 25 percent annual return over 33 years. Valued at over $1.1 (R16.3) trillion, it is currently the second-largest US public company after Apple.
It is comparable in size to the market capitalisation of the entire Johannesburg Stock Exchange, which weighs in at R17.2trln.
Computers of the 1970s were enormous and affordable only to large companies.
The market was dominated by IBM.
Bill Gates and Paul Allen founded Microsoft in 1975, while Steve Jobs and Steve Wozniak established Apple one year later.
Microsoft initially made most of its money writing software for Apple.
The companies collaborated during the first few years of the Macintosh (Mac).
However, when Microsoft launched Windows, challenging Mac, it resulted in acrimony that would last for years.
That was until Apple was on the brink of bankruptcy in 1997.
Bill Gates rescued Apple by agreeing to invest $150 million in Apple shares.
By 2003 Microsoft had sold back the shares to Apple.
Recurring revenue and product diversification are Microsoft’s greatest strengths.
Its Office 365 subscription service, which has more than 200 million commercial monthly active users, is still growing by 25 percent each year.
Office enjoys a near monopoly in office productivity software and is indispensable to many companies. It ensures a stable, reliable revenue stream for Microsoft.
Microsoft Azure gives businesses access to exceptional cloud computing resources.
Companies rent Microsoft’s cloud computing assets on an ad hoc basis, as opposed to building their own data centres.
Azure offers customers cost savings and enhanced operational flexibility.
The fast-growing cloud computing industry is projected to exceed $623bn by 2023; up from $272bn in 2018.
Microsoft is the second-largest player in this market and recently won a $10 billion 10-year cloud contract from the Pentagon.
Microsoft’s strong base of products and services will continue generating growth well into the future.
If its smartphones prove successful, it would create a new growth opportunity for the company and could even chip away at Apple’s market share.
The company’s transition to cloud should be revenue and earnings accretive in the long term.
Some of the $60bn cash on its balance sheet could also be used to acquire emerging trend leaders in adjacent or competing business areas.
Microsoft is currently on the expensive side compared to its earnings multiple history.
Investors pay a premium for its strong brand, robust balance sheet, relentless product growth and diversification, as well as its relatively lower risk compared to peers.
In addition, Microsoft rewarded shareholders with $33bn in dividends and share repurchases in 2019. Microsoft is a quality long-term investment that can generate solid returns for investment portfolios.
Frants Preis, CFA, is a portfolio manager at VEGA Asset Management based in Pretoria. Microsoft shares are held on behalf of clients.