Professional Documents
Culture Documents
Microsoft Corporation
ECON 454-91
Team Members:
- Desmond Martinkovic
- Zhihao Wang
- Kevin Huaman
I. Overall Macroeconomic Environment
For the overall macro environment analysis I did a PESTEL analysis. PESTEL stands for
Political, Economic, Social, Technological, Environment and Legal. The most important part of
the political section is political stability in the major markets. The score for this is moderate as a
result of each major market experiencing turmoil. The EU is experiencing immmigartaion issues
and a more aggressive Russia which threatens its stability. The US is experiencing hyper
partisanship and the east asia region is contending with a very aggressive China that seeks to
dominate its neighbors. For the economic section Microsoft scores well as a result of the
developed world moving past the coronavirus due to vaccines with the developing world
following some time 2022. Microsoft also scores well in the social section as a result of
increasing demands for goods that the United States is experiencing right now as well as the
stable global attitude towards leisure. In the technological section Microsoft is in a good position
as a tech company to take advantage of the desire for technology amongst the world population
and potentially expand its business into automation giving it a high score. For the environmental
section Microsoft has a major threat and an excellent opportunity resulting in a mixed score. The
threat to Microsoft is climate change which affects all businesses however due to Microsoft
being a tech company their exposure is not as high. Climate change also presents an opportunity
for microsoft as more customers care about the environment than in previous years meaning
microsoft could earn a loyal customer base if it can go green before its rivals. The legal
environment poses the most risks to Microsoft. The company in November was hit with an
antitrust complaint in the EU by a German software company and the rise of left wing populism
in the United States could result in more regulation or an antitrust lawsuit with the intention of
breaking up the company if a Bernie Sanders esq figure was elected in the US. The overall
PESTEL score for microsoft is good with the only serious issue being in the Legal sector.
Microsoft is a non cyclical company. I base this on the table I created below:
2013 29 1.84
The data show that Microsoft's increase in EPS is generally unaffected by the US business cycle
however in serious downturns like 08 and will be affected. I got the data for GDP and Microsoft
Microsoft Corporation operates within the technology sector, with its industry being categorized
products, the company's other ventures include but are not limited to: developing operating
management, and software development tools. Based on the North American Industry
Classification System (NAICS) which is a classification system developed for use by the Federal
Statistical Agencies for the collection, analysis and publication of statistical data related to the
US Economy, Microsoft Corporation is given the NAICS code of 511210- software publishers.
Companies given an NAICS code of 511210 primarily operate in computer software publishing
or publishing and reproduction. Companies operating in this industry carry out operations
necessary for producing and distributing computer software, such as designing, providing
For Microsoft, Microsoft Windows, also called Windows and Windows OS, is a computer
operating system (OS) developed by the Microsoft Corporation to run personal computers (PCs).
Microsoft, being the proprietary owner of said operating system, gives them control in licensing
The way Microsoft is structured allows for a straightforward path that enables the
company to grow year after year. Thanks to a 2015 firm structural change
Microsoft’s previous venture into “devices and services” which was Microsoft’s attempt to get
into the ever-growing phone market. What occurred was a restructuring initiative which saw the
Organization). This sudden shift was pivotal in maintaining Microsoft’s status as a dominant
force in the PC-compatible operating system market. To be exact, Microsoft Corporation has a
product type divisional organizational structure (Fourweekmba.com). What this means is that
Microsoft’s organizational structure allows for it to divide each division on a specific line of
goods and service. Each division is based on certain computer hardware and software products,
divide its distinct divisions, allowing for a better focus on product development. For example,
with a product-based divisional structure, employees at Microsoft are better tailored to work on
certain projects that best suit their skill set rather than be assigned to projects that they may
otherwise not be familiar with or accustomed to. For example, the company uses its Intelligent
Cloud division to offer innovative cloud computing services. A corresponding advantage of this
restructuring of 2015 by current Microsoft CEO Satya Nadella, because each division acts as a
semi-independent entity, each division is therefore equipped with the resources to accomplish its
goals. As a whole, this makes the divisional structure of Microsoft more adaptative. Divisions
can be added, removed, or merged as required and do not affect other units. Microsoft’s impact
on the economy has been tremendous. In 2008, just in its home state of Washington alone,
Microsoft was responsible for 39,311 employees, a significant increase from the 11,074
employees in 2004 (Theo S. Eicher, 2010). Furthermore, from 1990 to 2010, Microsoft was
without a doubt the single largest contributor to economic growth in Washington; it’s impact on
the state accounted for 28.5 percent of the total gain in state employment (Theo S. Eicher, 2010).
As the COVID-19 pandemic continues, Microsoft continues to see success stemming from
companies and corporations suddenly switching to remote learning and work. In fact, in an
article published on Jan 26, 2021 by the New York Times, Microsoft saw continued growth in
large part to remote computing and its gaming division, namely its Xbox series of home video
game consoles (Julie Creswell, 2021). In total Microsoft’s profits rose approximately 33 percent
as the pandemic continues to shift companies to cloud computing, and with new emerging covid
variants, this is likely to continue. To be exact, sales in the quarter hit $43.1 billion, up 17
percent from a year earlier, and profits rose 33 percent to $15.5 billion, Microsoft said. Some
challenges Microsoft faces are aligned with that of many of its competitors. While Microsoft has
cemented itself as a main proprietor of software and operating system software for well over two
decades, as companies try to expand into its market, Microsoft might have to adjust its strategy
to contend. Since Satya Nadella took the wheel back in 2015, Microsoft at the time has famously
Biggest Problems). Unfortunately for Microsoft, its promise to divert more attention to its mobile
division has largely been seen as a disappointment. In fact, Microsoft’s mobile market share
amounts to just 3.5 percent of Microsoft’s total revenue (Huffpost.com/Microsoft Four Biggest
Problems). As for its footing in the cloud industry, while Microsoft has seen more success in that
front thanks to the COVID-19 pandemic, its seen competition rise with Amazon and Google
Cloud being just some of its many competitors (Cloudwars.co/Challenges Cloud Industry). If
Microsoft is to distinguish themselves from its many competitors, they must separate themselves
from what they are mainly known for. This being Azure, Office 356, and PCs primarily.
Although all are fundamental to what makes Microsoft so influential, diverting more attention to
its other divisions should be of its utmost concern and thanks to how Microsoft Corporation is
structured, it should not be an issue. Microsoft continues to be among the most profitable and
growing companies in the world. As a company and a stock, Microsoft (MSFT 0.66%) needs a
brief introduction. With a presence in the PC software industry for years, the tech giant has
expanded its industry from cybersecurity software to cloud services and even gaming. There is
little evidence to suggest that Microsoft is done growing because of the ongoing COVID-19
pandemic of which has made PC software like remote desktop just that more impactful for the
everyday consumer. After years of corporate stagnation, CEO Satya Nadella helped Microsoft
turn the tide, and the company hasn't looked back. They have grown at a truly impressive mark
since he took the helm in 2014. Since then, the company's share price has rocketed 735% higher.
(Fool.com/ Microsoft Earnings). In fact, in June 2021, Microsoft became the second company to
have a $2 trillion dollar evaluation. And with the recent rollout of Windows 11, Microsoft shows
no intentions of back scaling any attention to its OS. But alongside improvements in its cloud
service, substantial growth has come from more people using Microsoft 365, which encompasses
apps like Word, Excel, PowerPoint, once again because of the COVID-19 pandemic. But even
more impressive, the operating income in each segment has been trending upwards. You can see
that over the last three years, Microsoft's revenue is up about 52%. Other notable additions to
every industry and help determine an industry's weaknesses and strengths. Five Forces analysis
understand how the five competitive forces influence profitability and develop a strategy for
sector/industry. The five forces that Michael Porter identified are as follows: Internal Rivalry,
Entry, Substitutes and Compliments, Supplier Power, and Buyer Power. For Microsoft, they must
find a balance between each other if they are to maximize their presence in the sector that they
are in. As for internal rivalry, if there's existing competition in the industry, it will drive down
prices and decrease the overall profitability of the industry. This competition takes a toll on the
overall long-term profitability of the company. Microsoft might have been the pioneers of early
versions of PC OSs, but now many other companies like Apple and Google are trying to get into
the market. However, by building a sustainable differentiation from that of other competitors,
Microsoft sticks out in a market that they have been pivotal in shaping for years. There is a
certain level of customer loyalty (e.g. long-time Windows users) that might make Windows have
a slight edge over competitors since their OS has been around for a lot longer
(Porteranalysis.com/Microsoft). Still, the internal rivalry is high for Microsoft. As for entry of
potential competitors, Microsoft being in the business of software development, means the threat
of new entrants is low. Because of the sheer cost it would take for competitors to enter such a
market makes the entry barrier high (Porteranalysis.com/Microsoft). Designing and developing
software like that of Windows 11 is very expensive. Its success takes a lot of time. Also, there is
a lack of people who have such knowledge and resources to prove to be competitors for
companies like Microsoft. Regarding substitutes and complements, Microsoft faces little to no
risk. As a highly influential software company, there is little worry that Microsoft and its many
proprietary properties are to be replaced soon with better alternatives. Microsoft is one of the key
innovators in their industry and is in a well-enough position to continue well into the future.
MSFT was created in 1975 with the name "Micro-Soft" given by Bill Gates, as in
“micro-computer software.” At the beginning, the company was founded by Bill Gates and Paul
Allen to develop software for an early personal computer, the Altair 8800. Then in 1980, the
company was hired to provide the operating system for IBM’s first personal computer (PC). Five
years later, the company launched the first generation of the well known software product---
Microsoft Windows. MSFT’s IPO took place on March 13, 1986, back then the company raised
$61 million. Nowadays The company is headquartered in Redmond in Washington, it has offices
in more than 100 countries and does business internationally. Based on the employment
Business Model
MSFT is a company that provides technological services and products to its customers.
As it is shown in the graphs below, this segment comprised 33.6% of revenue in 2019,
33.5% of revenue in 2020 and 33.2% of revenue in 2021. This segment consists of products and
2. Intelligent Cloud
This segment comprised 29.5% of revenue in 2019, 32.8% of revenue in 2020 and 35%
of revenue in 2021. It consists of the public, private, and hybrid server products and cloud
This segment comprised 37% of revenue in 2019, 33.7% of revenue in 2020 and 31.9% of
revenue in 2021. The More Personal Computing segment consists of products and services that
put customers at the center of the experience with technology. This segment mainly includes:
Based on the data, in the year 2019 and 2020, the More Personal Computing segment contributed
the most to the yearly revenue. In the year 2021, Intelligent Cloud becomes the main contributor
with a percentage of 35. The Intelligent Cloud segment has the highest growth rate.
MSFT is a conglomerate with multiple business lines, which allows the company to shift its
economic profit for the foreseeable future. Without a moat, margins will eventually erode until
they become equal to return on invested capital (ROIC). As a famous company known for its
computer related industry, MSFT’s strongest rivals include Apple, Google and Amazon. The
Office suite by MSFT has been in a dominant shape in the productivity application space for a
long time, but the rise of cloud computing is another force that cannot be neglected. Therefore, in
order to maintain its competitive advantage, MSFT will need to continue to grow its margins and
Microsoft's Office 365 has made progress in gaining market share thanks to more flexible
pricing, better support, and familiarity with traditional products. Office has a strong brand and
benefits from network effects, especially as collaboration and file sharing become more common
in business operations. However, fluctuations in market share suggest that the moat of the
segment is somewhat narrow compared to other major competitors such as Google. To address
this, Office consolidates supply-side economies of scale by combining cloud services and
2. Intelligent Cloud
Microsoft's cloud services unit is one of several key players in the global market, but
storage and related services are largely commoditized. Amazon.com Inc. dominates the industry
with 32% of the market, followed by Microsoft with 20% and Google Cloud with 9%. It was
followed by Alibaba Cloud with 6%, IBM with 5%, and Salesforce.com Inc. though with 3%
cloud services can promote overall economies of scale, but in this highly competitive space, it is
Combined with all versions of Windows, Microsoft has nearly 75% of the desktop
operating system (OS) market. It has a strong brand identity and users are familiar with the
operating system. It comes with most of the new PCS, illustrating and cementing its expansive
moat in the field. However, Windows accounts for less than 1% of the mobile device and tablet
market, and consumers are rapidly shifting to a place where Microsoft is no longer dominant.
There are concerns about the durability of the moat, at least as far as its current width is
concerned.
4. Cloud computing
The long-term growth of cloud computing presents growth opportunities for Azure,
Microsoft's cloud business. Many companies are moving to cloud computing because of benefits
such as cost savings on hardware and automated software integration. According to Gartner, the
global cloud computing market is expected to grow at a compound annual growth rate of 15.9%
from 2018 to 2022, when the cloud computing industry will reach $354 billion. Gartner added
that as many as 60 percent of organizations will use cloud-managed services from external
service providers by 2022, double the number in 2018. Azure has caught on to the cloud trend,
with revenue growing by a staggering 91% and 72% annually in FY18 and FY19, respectively.
However, thanks to Amazon's earlier entry into cloud computing than Microsoft, Amazon Web
Services (AWS) still dominated the industry with a 32.3% market share in 2019. Azure followed
MSFT has an independent Chairman of the Board who is appointed annually by the independent
members of the Board. The roles of Chairman and CEO have been separated since 2000. The
CEO of the company has primary responsibility for the operational leadership and strategic
direction of the Company, while its Independent Chairman facilitates its Board’s independent
engages with shareholders, and leads the Board’s consideration of key governance matters.
Based on MSFT’s commitment to its shareholders, it says “senior members of our management
team also speak with our shareholders and provide the feedback received directly to our board.
Our CEO, Satya Nadella, remains committed to investing time with our shareholders to increase
transparency and better understand their perspectives, including by participating in our quarterly
earnings calls.”
Stockholder Analysis
As shown in the Excel spreadsheet, MSFT stock has risen at an average rate of 41% per
year over the last 5 years, the best year in terms of growth for MSFT stock being 2019. The first
swing under analysis is the 10.22% decrease that took place between August 2020 and October
2020. After the COVID-19 pandemic transformed the way people interacted, Microsoft revenue
flourished as more and more people turned to Microsoft Office and Teams for school or work
purposes. This resulted in a rapidly growing MSFT stock price and a PE ratio of over 30 for
MSFT stock for the first time in history. For the quarter ending in September 2020, MSFT
reported better than expected earnings, however the outlook for the software development giant
was not as great as investors expected. The projected revenue in the “More Personal Computing”
sector of Microsoft at that time was $13.2 billion to $13.6 billion, to the slight disappointment of
investors. This most likely led to the decrease in MSFT stock price from $225.53 in August 2020
to $202.47 in October 2020. The second swing under analysis came during the period between
September 2021 and November 2021, when the price of the stock moved from $281.92 to
$339.69, a 18.36% increase. Several things likely contributed to the increase in stock price.
Firstly, it was reported Microsoft’s Intelligent Cloud Division grew at 31% in the preceding year.
Total revenue for this sector of Microsoft increased by $5.2 billion to $20.7 billion in the same
time span, representing a 37.5% increase. Likely due to the COVID-19 pandemic, Microsoft
Office 365 subscribers increased by 19.4% in the same one-year span. These figures being
reported to the public likely caused the drastic increase in MSFT stock between September and
value or growth stock. As of November 17th, 2021, the price of MSFT stock was $339.12, and
according to Microsoft’s 10k filing for the most recent year, Microsoft reported an EPS of $8.12.
Dividing these two numbers, we get a P/E ratio of 41.76. This is far less than the software
development industry average, which sits around 193. However, Microsoft’s P/E ratio sits around
the average of the computer services industry, which lies between 40 and 45. Further, Microsoft’s
P/E ratio is higher than the main industry competitors, such as Apple and Google, who have P/E
ratios of 26.55 and 27.70 respectively. Turning to the P/B ratio, we use the same $339.12 for the
stock price and extract a book value of $141,988 million under stockholder’s equity on the
balance sheet. Dividing stockholder’s equity by the 7,547,000,000 shares outstanding from the
income statement, this gives us a book value per share of 18.81. Dividing the price of $339.12
by this value, we get a P/B ratio of 18.03. This value of 18.03 is higher than the software
development industry average, which is currently around 15, and is lower than the
computers/peripherals industry average which is around 23. Interestingly, this P/B ratio is much
higher than the computer services industry average which is 4. With this mix of results when
comparing Microsoft’s P/E ratio and P/B ratio with industry averages, it is easy to see why
Risk Analysis
***
Return Analysis
***
The most drastic of financial metrics for Microsoft in the past 5 years is the dip in net income
and EPS between 2017 and 2018, when EPS dropped by 34.65% and net income dropped by
34.99%. Both measures increased by over 100% in the following year. 2020 was a solid year
for MSFT stock across the board, with sales revenue increasing by 17.53%, the largest value year
over year for the time period studied. Net income also rose by 38.37% in 2020. MSFT stock
price consistently rose over the years studied, growing especially fast in the latter 3 years. MSFT
average market cap and average sales revenue follow closely with competitor GOOGL.
Microsoft average net income edges out Alphabet, however GOOGL average EPS lies much
Realistically, there are not any financial metrics that should concern MSFT investors. Most or all
metrics suggest a strong, growing company with solid financials and fantastic upside potential.
V. MSFT Stock Valuation
As shown in the Excel sheet shown here, we have calculated the intrinsic value of MSFT stock
price to be $352.32 per share. This is based on the inputs found at the top of the sheet. We used a
value of 18% for the revenue growth rate. Compared to Microsoft’s past five revenue figures this
figure is conservative but fair, since the last full year saw a 17.5% increase in revenue for
Microsoft. We assume a 3% decrease in revenue per year as well, firstly because of worrisome
macroeconomic factors, mainly inflation, that could slow revenue growth for major corporations.
Further, g must be lower than WACC in the terminal year in order to get an accurate terminal
value reading.
As of December 2nd, MSFT stock is trading at $329.77 per share. This indicates
Microsoft is currently undervalued when compared to the market value, meaning Microsoft’s
shares are currently trading at a discount. MSFT currently has a price-to-book ratio of 16.31,
meaning the book value is $20.22 per share. This is a very high ratio, but it is normal for a stock
traded at such high volume as MSFT. Fair value estimates typically range between $310 and
$360 per share for MSFT, placing our intrinsic value calculation of $352.32 in the typical range;
analysts at Morningstar arrived at a fair value estimate of $345 per share, namely because of
their wide economic moat. In late October of this year, Yahoo Finance analysts put the intrinsic
In the case that Microsoft’s remained constant at 3% per year, possibly due to supply chain
problems associated with the COVID-19 pandemic, the intrinsic value of MSFT stock price
drops to $240.06 per share, all else held equal. As shown in the Excel sheet below, the drop in
intrinsic value stems from the greatly reduced free cash flows associated with the lower revenue
growth rate.
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