In the latest of our ‘never-sell’ stocks, we take a closer look at Microsoft, one of the few trillion-dollar companies in the world. The foundation story of Microsoft is well known, as both Bill Gates and Paul Allen created the business from their garage in 1975 as they sought to capitalise on the growth in demand for personal computers. As the story has it, both are now among the richest people in the world with $100bn and $20bn between them, along with in Paul’s case an ownership stake in both the Seattle Seahawks NFL team and the Portland Trailblazer’s NBA team.

The company is renowned around the world for its Microsoft Windows, Office and Internet Explorer software but is so much more than that today. The business now develops, manufacturers, supports and sells computer software, consumer electronics and personal computers among other things. Interestingly, Microsoft is one of the most active acquirers of new businesses around the world, which as been a key plank to their success over several decades, making them one of the few pre Dot.Com companies to remain in the top 10 by market cap 20 years on.

The company has been well lead over the last decade, initially by Steve Ballmer, who directed the business down the ‘products and services’ route including the launch of the now popular Surface Pro Tablet and Laptops. More recently, under CEO Satya Nadella the business has pivoted once again moving heavily towards Cloud and Enterprise computing services.

Microsoft is very clear in their mission to ‘empower every person and every organisation on the planet to achieve more’. In fact, there operations are contributing to massive changes in the way all companies do business and leading to more efficient operations around the world. Take for instance my business, Wattle Partners. We moved away from a physical server close to a decade ago and have never looked back. All relevant documents are scanned and stored securely via Microsoft’s Azure Cloud platform, our emails run through Outlook and we are access everything from anywhere in the world. Many businesses would have entered this COVID-19 disruption with great concerns about how they can continue to service their customers to the same level, but by partnering with Microsoft the service has been seamless.

After a record year in 2019, Microsoft, along with almost every business, has been impacted by the supply chain and demand disruptions of COVID 19, seeing its share price fall from $190 to $137 today, a loss of 27%. Yet the company is likely to be one of the bigger beneficiaries of the change in business practices, evidenced by the now 44 million daily active users of their Microsoft Team’s communication platform. Whilst now less relevant, Microsoft’s December quarter earnings results were highly impressive:

  • Total revenue improved over 11% to $36bn;
  • Productivity & Business Division (Office) – Revenue increased 17% to $11.8bn;
  • Intelligent Cloud – Grew 27% to $11.9bn, including 62% growth from Azure storage;
  • Personal Computing – Saw the Surface have a record $1.9bn sales quarter, up 6%;

As you can see, all three business units have a near equal attribution to group revenue and all improved in the quarter; most importantly the company makes money, with Net Profit of $11.6bn. Microsoft were one of the early adopters of the subscription model for their Office software, which was originally questioned by market commentators, but has been an overriding success providing a near annuity stream of earnings for shareholders.

One of the key reasons we view Microsoft as a never sell stock, is there dedication to growth opportunities. They acquired Linked In and 2016 for $26.bn and have successfully monetized a platform that many never saw as being possible. Their business is likely receiving great benefits from the current shutdown from a combination of their online collaboration tools and their ownership of the XBOX gaming platform, which is increasingly popular for those confined to their own homes.  They also purchased Skype for $8.5bn in 2011 and have leveraged this technology to challenge the likes of Zoom Communications as more business become nimble and move to video-conferencing. But most importantly, it’s the growth of their cloud platform, which has seen revenue increases of 62%, 59%, 74%, 73% and 76% over the last five quarters.

Having IPO’s at $21 and undertaken nine share splits, the average cost for Microsoft’s first investors is just 9 cents, compared to today’s price of $137. After recent falls the company trades at a PE of around 25x and warrants a position in the portfolios of all long-term investors.