Meta Platforms Votes For Microsoft As An Investment

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Microsoft Corporation (NASDAQ:MSFT), similar to Apple (AAPL), is unique among large technology companies in that it was major in the 1990s and is still relevant today. Microsoft in particular has a diversified asset base. With Meta Platform’s (META) recent announcement that the company is partnering with Azure, including $10s of millions in supercomputing resources, highlights Microsoft’s ability to generate substantial shareholder rewards.

Microsoft Financial Performance

Microsoft has continued to generate relatively strong financials, highlighting the company’s strength.

Microsoft generated $49.4 billion in quarterly GAAP revenue, with a 68% gross margin, and 18% YoY growth. Financially, the company’s GAAP and Non-GAAP operating income were both $20.4 billion, showing no accounting tricks, and the company’s net income was roughly $16.7 billion. The company earned $2.22 per share in GAAP diluted EPS, showing reasonable growth.

The company’s annualized earnings GAAP are roughly $9 / share, indicating a P/E ratio of ~29, respectable for the company’s continued growth. That’s a sign of the company’s recent weakness. The company saw 28% GAAP constant currency growth in commercial bookings, taking that to $155 billion, providing consistent additional revenue.

It’s also worth noting that the company’s cloud revenue has continued to grow and now makes up almost 50% of the company’s revenue with a 70% gross margin.

Microsoft Continued Financial Performance

Microsoft has continued to generate strong financial results from the company’s overall financial positioning.

The company returned $12.4 billion to shareholders, up 25% YoY, through $4.6 billion in dividends and $7.8 billion in share repurchases. That’s a roughly 2.5-3% annualized shareholder yield. The company’s operating expenses were $13.4 billion, supported by continued investments that the company made in its business.

The company had a 17% effective tax rate, with $6.3 billion in capital expenditures. That means the company is spending ~1.5% of its market capitalization on capital expenditures annually to focus on its growth. The company’s $80 billion in annual FCF is incredibly strong, at 4% annualized, giving the company more room to increase shareholder returns.

The company’s balance sheet remains incredibly strong showing the company’s overall ability to continue driving shareholder returns.

Microsoft Business Highlights

Microsoft’s overall business segments have remained strong and continued to have exciting highlights.

Microsoft has seen strength across the board even in what can be considered more legacy products like Windows and Xbox. The company’s HW segments, including Surface, continued to perform incredibly well. Financially, the company’s strongest segment remains the cloud and the company saw 29% net YoY growth here.

The most important part of Azure is it continues to remain very profitable with margins remaining roughly constant. This is one of the two profitable clouds (along with AWS), and Google Cloud (GOOG) (GOOGL) continues to lose money. The company’s productivity and business process segment also saw strong performance as its Office and LinkedIn products continue to dominate.

Microsoft Shareholder Return Potential

Microsoft has $10s of billions of FCF and the ability to turn that into substantial shareholder returns. The company approved $60 billion in share buybacks in late 2021, which is an almost 1% dividend yield, and enough for the company to repurchase roughly 3% of its outstanding shares. The company can generate roughly 3-4% current shareholder returns.

The company still isn’t at a “cheap” valuation, however, being able to continue reasonable returns and double-digit growth, will enable the company to generate long-term shareholder returns.

Microsoft Unique Offering

In our view, Microsoft offers investors a unique offering that can’t be seen in any other tech company.

First, the company has an incredibly diversified asset base. Versus Apple which is very reliant on the iPhone, Amazon on AWS / Amazon (AMZN), or Alphabet on Google / YouTube, Microsoft has many more product verticals. The company has LinkedIn, Xbox, Surface, Bing, Windows, Office, Azure, and more. Each of these products doesn’t rely on the others to succeed.

At the same time, the company isn’t a substantial competitor with its peers in many ways. Of course Azure competes and Windows competes with Apple (although to a smaller extent). However, the competition is less than Amazon, for example, faces with numerous other retail companies, which enables the company to garner customers who are less of a fan of AWS.

That unique offering, means that we expect Microsoft to continue to maintain a substantial market position and strong Azure revenue.

Thesis Risk

The largest risk to our thesis is valuation and competition. Microsoft at a 3-4% shareholder yield is focused on future growth, and its valuation is dependent on it. However, the company is also simultaneously competing with some of the largest corporations in the world, as evidence by the company’s recent announcement to increase compensation across the board.

In our view, this helps to highlight how Microsoft is a valuable investment for shareholders.

Conclusion

Microsoft is a unique company. Meta Platforms just reaffirmed its faith in the company with a substantial investment into Azure. The company, which is one of the largest tech companies, is indicating that investing in its own cloud isn’t economical versus investing into Azure. The company also has numerous other investments that are economical.

Microsoft is committed to shareholder returns. The company has a strong balance sheet and it continues to pay a modest dividend along with significant share repurchases. At a 3-4% valuation, investors are still betting on future growth; however, we expect that Microsoft will be able to reach these expectations and continue generating shareholder returns.