Microsoft Self-stated Vision
There was a document filed by antitrust regulators in a U.S court last week that goes back to the company’s Q4 of 2022, that would be Q2 of 2022 calendar year. I have no idea where the document comes from, but the information contained in it is phenomenal. There is vital information about management’s vision for Microsoft and how they plan to make it happen.
Windows, a stable business
We discussed in Microsoft’s research article how difficult can Windows be to displace. As of Q3 FY2022 (Q1 2022), Windows held a 62% market share on ‘>9 WW device unit shipments’ (PC equivalents, clarified in a note). Management mentioned demand was still 140% above pandemic and there were 100M+ units shipped in each of the previous 8 quarters. Market share increased yearly, but decreased on a 2Y basis. On the consumer side, something similar occurred to market share and now Microsoft holds 45.7% of it.
Advertising landscape
Fascinating to see Apple’s advertising business unit was estimated to be at 5.1bn dollars (20bn annual run rate) in the first quarter of 2022 and still growing at 33%. This has been extremely overlooked (by me as well) and Apple could well be the reason why many ad companies are still struggling. It seems to be aggressively taking market share. Alongside Amazon, they both are crushing competition.
Microsoft could also be a reason, but on a smaller basis. In here, the company includes LinkedIn, Microsoft Messenger and Xbox. One last thing I want to highlight is how larger Google was (and still is) than its peers. Alphabet has successfully kept and increased their annual run rate, which, given how competition looks, is nothing but a merit.
Moving forward, we’ll cover the long term vision and thesis management has for Microsoft and how do they plan to achieve it.
Microsoft’s financial vision
“Our long-term financial ambition is to grow at more than 10% p.a. through this decade to become a $500 billion revenue business by FY2030 while still growing revenues at 10% p.a. or more at that time. As we scale, we have the opportunity to grow earnings faster than revenues which enables us to deliver returns commensurate with shareholder expectations”
Microsoft estimates their current TAM to be around 2.2 trillion, around 55% of the global technology landscape. The company refers to their addressable market as strongly supporting their ambition. All of Microsoft business has huge tailwinds and they recognize it. Management says that tech spending as a percentage of world’s GDP will double in the coming years. Tech output will increasingly overtake every other sector’s input as COGS and Opex are continuously digitized.
Before going into the details, the following image contains a very peculiar revenue breakdown of Microsoft’s business. It shows, finally, Azure’s size, which was at 34bn for the FY22 (estimated) and Microsoft’s Security business at an 18bn dollar run rate. Nevertheless, Azure is not only infrastructure, or not purely that. So it’s kind of tricky, but it seems as if 34bn was its FY22 run rate.
Infrastructure, Azure
Microsoft recognizes Azure is the cornerstone of their cloud strategy and a core driver of the company’s future. Management’s ambition is to be “the world’s computer. We want to transition from being the trusted public cloud for enterprises to becoming the trusted, ubiquitous cloud to edge platform for all organizations and applications.” Microsoft also states:
“We know we are winning when we consistently win tier-1 infrastructure workloads.”
In the document, it is also shared what management visualizes as the long-term opportunities and what to focus on:
Develop consistent infrastructure, products, and business models to win the edge of the cloud
Grow cloud native apps
Embrace emerging digital sovereignty needs (traceable with government contracts)
Design first-class silicon chips to underpin cloud and AI efforts
This last point really called my attention. Microsoft seems to be following the path of the other hyperscalers, designing their own chips. I do not know how could this impact Nvidia moving forward, but Microsoft announced two partnerships with the them in the past year.
The first was in November of 2022, where they signed a multi-year collaboration to build one of the most powerful AI supercomputers. The second one was on May of this year in which Nvidia announced it was integrating its Nvidia AI Enterprise Software into Azure’s ML to help accelerate AI initiatives. The conjecture I can come up with is that I suppose Nvidia wouldn’t be partnering with Microsoft if they saw them as competitors. Or perhaps both deals have higher ROIC than designing Microsoft chips.
Data and AI
Microsoft wasn’t lucky in being one of the leaders of this AI wave, they’ve been thinking about it for a long time and building the best infrastructure to develop AI products. Management said they wanted to add 10bn in revenue to their data and AI business over the next 3 years, driving it to 26bn. This was 5 quarters ago and, as it seems, they could exceed expectations.
“We know we are winning when our share of organizations’ data estates is growing.”
To achieve their goal, Microsoft was prioritizing on accelerating SQL migration to Azure, drive preference for Azure managed databases and accelerate AI adoptions. Over the long run, what they see moving the needle is:
“Creating a new data platform category by integrating databases, analytics, AI, and data governance into a comprehensive offering that further differentiates against point players such as Snowflake”
Make Microsoft the leader of AI
Continue working on mixed reality
Digital and application innovation
Microsoft thinks a crucial market moving forward is the digital and application innovation, which includes the developers space (“69bn market by FY2024”). Of course, GitHub is part of the core thesis and management states:
“We know we are winning when: every developer project starts with GitHub and grows into our full Dev SaaS suite”
As the long term needle movers, Microsoft sees winning customers that are born in the cloud, invent AI-first digital tools, “win the communications PaaS market dominated by Twilio” and expand the developer tools market. The clearest product Microsoft has launched in this regard is GitHub Copilot.
Hybrid work
The company knows the work environment has changed and they are doing what it takes to lead in this new opportunity. Microsoft Teams is a key element here. I always prefer summarizing what things say, but this image clearly explains everything and with little to no words.
“We know we are winning when we are gaining traction with Small Business, Digital Natives, EDU segments for our cloud solutions”
Security
It should be no surprise by now that Microsoft is the biggest security vendor in the world. They mentioned feeling very comfortable in the space and believe they are well positioned for continued growth towards their FY25 target (which is unfortunately cut). Microsoft’s security business unit is over 20bn and it seems it will continue to benefit from the immense secular tailwinds in the space.
“We know we are winning when customers choose us for their end-to-end multi-cloud/multiplatform needs”
Gaming
Microsoft’s ambition for gaming is to reach industry leadership by 2030. That would imply them doubling the company’s gaming revenue. They believe they can achieve this by accelerating Xbox console growth and increasing players’ reach across cloud and devices (partly done through cloud gaming). Here, I found something that could suppose a complete game-changer for the gaming environment, as Microsoft envisions a new business model (no novelty though, we covered it on the research article, but I like the framing).
“Business model diversity: Empower creators success and reduce access barriers for players by offering the full breadth of business models, across transactions (Store), subscriptions (Game Pass), and advertisements.”
Finally, they want games diversity and the solution for this is to become the platform of choice for creators globally. This is why I believe they are pushing for Activision’s deal. Blizzard’s portfolio would allow Microsoft to make a definite transition towards an exclusive ecosystem and, given the popularity of some titles, it would attract gamers and creators would follow.
Professional social network
LinkedIn is one of the pillars of Microsoft’s thesis. They want to provide economic opportunity for every member of the global workforce and, to that end, LinkedIn has built a large community to whom they sell services in exchange for value.
Investments on LinkedIn are focused on hiring and shaping the future of B2B commerce. To achieve this in the short run, management is developing an active community of creators (seen with things like newsletters) and they are positioning LinkedIn as the best partner for hiring/workforce analytics to companies of all sizes.
In the long term, from what management says, I see a lot of potential value creation:
LinkedIn wants to scale recruitment, but, more importantly, it wants its learning business to be able to provide true certifications of knowledge. That implies disrupting the whole education system.
They want to become the de-facto platform for B2B marketers and empower professionals to monetize their expertise.
“Create, co-develop and license original first-party content: LinkedIn’s professional context may enable us to produce and distribute high-value niche professional content profitability.” No clue what this specifically means.
Modern life
Today’s world is all about efficiency and utilizing time as best as possible. Microsoft’s envisions a world in which they get to serve 1.5bn people daily with productivity tools of all sorts, from software to services, to life, education and devices. The market derives from personalized Windows experiences. Microsoft would leverage their dominant OS to integrate all these features.
“We know we are winning when developers choose our store as the place to reach customers with the highest ROI; we have multiple apps with 100M+ DAU on mobile platforms”
The long term opportunities Microsoft sees moving forward are, firstly, moving Windows increasingly to the cloud. This should enable AI-powered services, integrations, and higher accessibility for consumers. The following one is very interesting because it has concrete implications, I’ll quote directly:
“Explore inorganic growth opportunities through partnership or acquisition of popular daily active use experiences”
Personal commentary
I decided to omit the part of “business apps” and the “search, news and ads” as I didn’t see any new information there. I hope you enjoyed the write up and feel free to subscribe below. Next research articles will be about Zoetis, the semi industry and the construction industry.