Microsoft is the largest enterprise software vendor in the world. The company founded in 1975 has a broad suite of product offerings with diversified exposure across many industry verticals. As well as being the leading provider of office productivity tools, server tools and PC operating systems, Microsoft has established itself as a leading global cloud-services provider outside China, along with Amazon Web Services. While the company has a strong presence in commercial and consumer segments, it generates most of its sales from commercial customers.
Companies around the world are still at the early stages of adapting, modernising and infusing their businesses with digital innovations – this is often referred to as digital transformation. Microsoft is positioned as a key beneficiary of this disruptive trend thanks to its commercial cloud businesses, including Azure. Azure is competitively advantaged with its hyperscale infrastructure footprint, breadth of capabilities, and enormous R&D engine supporting rapid innovation cycles – characteristics that are incredibly difficult to replicate. Microsoft is able to leverage those capabilities across its broader portfolio as a flywheel for new solutions like security.
But Microsoft’s opportunities extend well beyond Azure. These areas include analytics, application development, customer insights and enterprise resource planning. In productivity, Office 365 and its collaboration platform Teams expand the addressable market with fresh uses and applications into promising new areas such as healthcare. Microsoft’s enterprise incumbency and its status as a trusted partner position the company to cross-sell its product portfolio and deliver a suite of integrated solutions to customers. This ability has become even more important since the covid-19 pandemic accelerated IT transformation.
In public cloud, Microsoft has formidable competitors in AWS and an increasingly competitive Google Cloud Platform, but we believe the opportunity is large enough for all three players to thrive.
While the cloud opportunity is astounding, a significant part of Microsoft’s business is still derived from its traditional on-premises software. Windows is the world’s dominant PC operating system, but PCs have been in secular decline, particularly with consumers, as computing modes have diversified to alternative devices like smartphones. However, we view PCs as fulfilling productivity use cases that are unlikely to be substituted by mobile devices. Microsoft’s Server products, including Windows Server and SQL Server, also follow the traditional perpetual licensing software model. However, these are not truly pure on-premises businesses, as they can also be deployed in the cloud or as part of hybrid landscapes, and therefore ought not to be viewed in isolation from Azure. In other words, we think these businesses are likely to remain resilient.
In summary, we view Microsoft possesses strong moat characteristics in an industry that is at the early stages of a substantial growth opportunity. Digital technology-led disruption is accelerating and Microsoft is at the frontier.