Microsoft's ( MSFT ) stock has gone up by 231% over the last five years, driven by growth in the company's Intelligent Cloud business and rapidly expanding net margin. Trefis captures Why Microsoft's stock has jumped 3x in 4 years in an interactive dashboard, parts of which are summarized below. Additionally, you can see more Trefis technology company data here .
Notably, the strong rally in stock price over this period is indicative of the market expectation of a steady growth across the business fueled by the Intelligent cloud. The management has also been pointing towards making all Microsoft's applications based on the Azure cloud, and eventually providing incremental analytics firepower to upsell and cross-sell products. Strong revenue growth, upbeat margins and significant growth potential have also had a positive impact on P/E multiple - helping it trend higher over the years.
A Quick Look At Microsoft's Business Model
Microsoft is a technology company that makes money from the sale of software and hardware for consumer and enterprises. The company's revenue ($126 billion in fiscal 2019, ending June 31) is reported in the following three segments:
- More Personal Computing (2019 revenue of $46 billion, contributed 36% to total revenue ): Segment revenue is derived from the sale of operating systems, devices, gaming offerings and search products.
- Intelligent cloud (2019 revenue of $39 billion, contributed 31% to total revenue ): Segment revenue is derived from the sale of public, private and hybrid server products and related cloud services.
- Productivity and Business Processes (2019 revenue of $41 billion, contributed 33% to total revenue ): Segment revenue is derived from the sale of subscription to Office, revenues from LinkedIn and from Microsoft's on premise and cloud (Dynamics 365) enterprise solutions (including CRM and ERP).
Summarizing Fiscal Q4 and Full-Year 2019 Performance, And Highlighting Our Expectations For 2020:
- Total Revenue increased by 22% to $126 billion in 2019 from $103 billion in 2015. In Q4 2019 revenue reached to $34 billion (12% y-o-y). We expect 2020 revenue to reach $134 billion (7% y-o-y).
- More Personal Computing revenue increased by 6% to $46 billion in 2019 from $43 billion in 2015. In Q4 2019 revenue reached to $11 billion (14% y-o-y). We expect 2020 revenue to reach $47 billion (3% y-o-y).
- Intelligent Cloud revenue increased by 64% to $39 billion in 2019 from $24 billion in 2015. In Q4 2019 revenue reached to $11 billion (19% y-o-y). We expect 2020 revenue to reach $42 billion (7% y-o-y).
- Productivity And Business Processes revenue increased by 56% to $41 billion in 2019 from $26 billion in 2015. In Q4 2019 revenue reached to $11 billion (4% y-o-y). We expect 2020 revenue to reach $45 billion (10% y-o-y).
- Over the period 2015-2019, net income margin increased by 1935 bps to 31% in 2019 from 12% in 2015. We expect net income margin for 2020 to reach 32% (86 bps y-o-y), translating into a net income of $43 billion.
Per Trefis estimates, the EPS for fiscal 2020 is likely to be $5.55. Taken together with a P/E of 28x, we expect the fair value of the company to be $156 per share.
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