Microsoft Corp.’s MSFT evolving strategy is creating a stronger business with higher growth potential. Its shift toward a subscription-based business model is continuing, with a 24-month Xbox subscription now available.
The company’s cloud computing growth potential could benefit from a widening of its availability into new industries. The automotive sector in particular could prove to be a reliable growth segment in the long run, with an increasing number of new vehicles set to rely on the cloud.
Although the company’s stock price has risen 56% in the last year versus a 16% gain for the S&P 500, further outperformance of the index could be ahead.
Cloud computing potential
Cloud computing could catalyze Microsoft’s financial performance, with its Intelligent Cloud business contributing 32% of its total revenue. Growth within the division is stronger than in the wider market, with the company gaining share versus current market leader Amazon AMZN. The global cloud services market is expected to grow from $153.5 billion in 2017 to over $300 billion by 2021. The adoption of the company’s Azure cloud platform could increase as the service expands its availability into a number of new verticals, such as health care and government applications.
Sales in Microsoft’s cloud business could be boosted by increasing demand from the automotive industry. A large portion of the data generated by sensors on board a connected car is sent to the cloud. This includes information such as speed, updates on the health of the vehicle and driving conditions. Such information provides the foundation for driverless cars to be further developed, with it offering insights that improve safety and reduce maintenance requirements. With the company anticipating that 90% of new cars will be connected to the internet by 2020, demand for cloud services from the automotive sector is set to increase.
Evolving strategy
Subscription services have proven popular for a range of Microsoft products in recent years. The company’s latest offering in this space is Xbox All Access. It bundles hardware and a subscription game service into a single product. For $21.99 per month, an individual receives an Xbox One S console alongside Xbox Live Gold and Xbox Game Pass subscriptions. Over the two-year subscription period, a customer would pay 20% less than through buying the products upfront.
All Access reduces the initial cost to a consumer, which may increase the number of customers within the Xbox ecosystem. The company also plans to develop a cloud-based console that streams games. This is likely to be cheaper than a conventional console, while its Azure platform could provide it with a competitive advantage versus peers. The potential for subscription opportunities within Skype, as well as Surface tablets, laptops and a range of other products, could lead to greater repeat business in future.
Lack of content
One area where Microsoft lacks exposure versus its major tech rivals is the streaming video segment. It lacks the necessary media content to provide any direct-to-consumer content delivery. In contrast, Netflix NFLX and Amazon have built dominant positions in the streaming video space, while Apple AAPL is adding programs to its Apple Music Service through a $1 billion content budget. Similarly, Facebook’s FB Watch feature will provide it with access to the fast-growing streaming segment.
Microsoft, though, has the financial strength to acquire technology or widen its corporate profile. Its free cash flow of over $30 billion per annum has contributed to a $57 billion net cash position. The company has a track record of making acquisitions and successfully integrating them. For example, LinkedIn has been a relative success, while the recent acquisition of artificial intelligence-focused startup Lobe provides the company with access to a growing market. Since the artificial intelligence industry is forecast to increase at an annualized rate of 37% between now and 2024, the company’s lack of exposure to streaming services may be offset by new growth opportunities elsewhere.
Outlook
The widening of Microsoft’s cloud computing services into new verticals could improve its financial outlook in what is a rapidly growing industry. The automotive sector has the potential to offer a relatively reliable income stream – particularly as driverless cars gradually enter the marketplace. A continued move toward subscription-based services and an expansion into the artificial intelligence segment could further diversify its operations and provide a greater proportion of repeat business.
Although the company lacks exposure to the streaming video segment, its balance sheet and recent history of successful merger and acquisition activity means acquisitions could provide it with access to the fast-growing segment. Therefore, after outperforming the S&P 500 in the last year, the stock could have investment potential.
