Microsoft: On Cloud Nine
Microsoft: On Cloud Nine Read More »
Microsoft unveiled their Q3 2024 results last week. Revenue for the quarter reached $61.9 billion, marking a 17% year-over-year increase. Meanwhile, net income for the same period amounted to $21.9 billion, reflecting a 20% year-over-year rise. The primary growth driver for Microsoft’s revenue was their cloud services segment, encompassing products and services such as OneDrive and Azure. Cloud services revenue for the quarter totalled $35.1 billion, increasing by 23% year-over-year. As of Friday, 26 April, Microsoft held the title of the world’s most valued stock, boasting a valuation of just over $3 trillion.
Microsoft has been among the beneficiaries of the Large Language Model hype that surged last year and this year. Microsoft has invested approximately $13 billion in OpenAI, the creator of ChatGPT. Microsoft does not have any ownership stake in OpenAI. But, they are entitled to a share of profit distributions. Microsoft’s cloud service, Azure, enables businesses to deploy their AI applications using their servers. However, Microsoft has stated that the demand for their AI services currently surpasses their current capacity. Consequently, they are ramping up their capital expenditure. In the latest quarter, they spent $14 billion on capital expenditure, exceeding the anticipated $11 billion.
Microsoft encounters formidable competition from other well-resourced rivals such as Amazon and Alphabet in the cloud computing/AI arena. As companies expand, scaling their market share becomes progressively challenging compared to their initial growth trajectory. Frequently, firms seeking to increase their market presence through acquisitions find themselves paying a premium to entice shareholders. Recently, Microsoft concluded its acquisition of the gaming giant Activision for just under $70 billion. Only time will reveal whether Microsoft has potentially overpaid for the company, or whether they were able to use their platform to create a more compelling gaming experience for users.
Microsoft not only provides cloud and gaming services, it’s Office suite of business tools is widely used in businesses and homes worldwide, it also provides on-line security, data management, virtual meeting services (Teams) and search services, amongst others.
Microsoft and Amazon held in the Lunar BCI Worldwide Flexible Fund and by Lunar Capital’s Offshore Portfolio clients.
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This stocktake is prepared for the clients of Lunar Capital (Pty) Ltd. This stocktake does not constitute financial advice and is generated for information purposes only.
Microsoft: On Cloud Nine Read More »
When companies grow to become large/mega cap businesses, they face both challenges and opportunities when they try to grow further. The specific circumstances for each company’s position significantly influences the potential or the impediments for continued expansion. Below are a few examples of some of the challenges and opportunities these companies may face.
The Challenges
Acquisitions
In acquisitions, large companies face a limited pool of targets due to fewer medium and large-sized companies compared to the number of small companies. Factors like compatibility and pricing reduce this pool further. With greater financial resources, acquiring companies often pay a premium for these companies to entice them to join. This trend is evident across numerous instances. For instance, in 2014, Facebook acquired WhatsApp for $19 billion. A decade later, WhatsApp boasts over 2 billion users but generates minimal revenue, estimated at around $1.2 billion for the previous year. Warren Buffett also regularly advises the lack of potential acquisition targets that Berkshire Hathaway can make to make a meaningful difference in their portfolio.
Product line and different markets
As companies achieve significant market share in different markets, introducing new products or expanding into new markets may not provide the same revenue and profit increases they previously enjoyed. Nike is currently experiencing this. Despite Nike rolling out numerous new products Nike’s revenue has had a compound annual growth rate of 7.2% for the last 2 fiscal years.
Corporate Constraints
As companies grow, their delivery platforms and teams need to be expanded to support their enlarged customer base and higher volumes. This may have been achieved with previous generation technologies and smaller more agile and flexible teams. With a larger client base and higher volumes and a complex platform, they may not be as agile as they previously were, increasing the time and costs of rolling out new products, services, and features; and allowing smaller, more nimble competitors to steal a march on them. Google is experiencing this with the roll-out of their AI tools, for example.
The Opportunities
Platforms
Businesses built as platforms, i.e. where multiple services are provided to clients, and new products or services can be added very quickly, however have an advantage despite their large/mega size. As platform businesses Microsoft, for example can expand by adding new features and services to their platform and further entrench existing and new customers into their ecosystem. Microsoft’s 365 product suite facilitates bundling various products, making it challenging for customers to switch once integrated. Moreover, they swiftly deploy new products to a vast customer base. For instance, between 2017 and 2023, the number of Microsoft Teams users surged from 2 million to 320 million, solidifying its leadership in virtual meetings arena.
There are many opportunities for companies to grow, but as they keep on growing there are certain challenges that they face. Some companies have a better ability to deal with these challenges than others.
Berkshire Hathaway and Microsoft are held in the Lunar BCI Worldwide Flexible Fund. They are also held by Lunar Capital’s Offshore Portfolio clients.
Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.
Our email address is: [email protected]
Disclosures
Lunar Capital (Pty) Ltd is a registered Financial Services Provider. FSP (46567)
Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/
Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/
The Lunar BCI Worldwide Flexible Fund Fact Sheet can be read here.
This stocktake is prepared for the clients of Lunar Capital (Pty) Ltd. This stocktake does not constitute financial advice and is generated for information purposes only.
Balancing the Scale Read More »
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