- Microsoft's acquisition of Beam should mean faster growth for Beam going forward. Furthermore, Xbox live subscriptions will grow.
- China is still a huge untapped market for growth. Through partnerships and acquisitions, Microsoft is making the right moves here.
- Growth in the Microsoft "Azure" cloud should be able to offset declines in hardware and Windows Server revenues.
The information technology space is changing fast. Microsoft Corporation (NSDQ:MSFT) has the balance sheet and cash reserves ($113 billion reported at the end of the last quarter) to pivot quickly in this space and that is exactly what it is doing. Even though Microsoft's cloud is growing meaningfully, this company still derives most of its revenues from its P.C divisions. Therefore, the company knows a lot of investment is going to be needed to compete across many divisions - not just the cloud. The good news for shareholders is that Microsoft should be able to invest meaningfully in its business as well as reward shareholders through buybacks and dividends. And that is exactly what the company has done.
Last week, the company announced that it would be returning $40 billion to shareholders through share buybacks. Furthermore, Microsoft announced an 8% increase in the quarterly dividend which means the new payout will be $0.39 per share per quarter. Long term investors would state that these announcements are nothing new. The float has come down meaningfully over the past few years. In fact, the number of shares outstanding has gone from 8.4 billion in 2014 to 7.8 billion currently. This is why this company has a large following of dividend investors. Its financials are strong, it rewards shareholders and is aggressively investing in its future.
Beam Acquisition Could Be A Game-changer
Speaking of its future, gaming is one area where the company is investing heavily. Xbox live subscriptions grew by over 30% last quarter and I believe growth here is just getting started. Why? Well, tech companies more and more are looking for areas where recurring income is pretty much guaranteed. Multiplayer gaming through the internet will definitely become an area with high demand going forward. This is why Microsoft invested in Beam (a multi-player live stream service) last month to cement its authority in this area. The combination of beam and Xbox live is an exciting prospect as it should result in a more engaging and enjoyable experience for both viewers and gamers alike. Microsoft hasn't wasted any time in promoting this new service. In fact, Beam is due to be available on Windows 10 and Xbox One this winter. Look for subscriptions to rise meaningfully from here.
Microsoft Still Wants To Thrive In China
In terms of investment outside North America, China remains a key market despite near term head winds. For example, despite XiChuang acquiring Microsoft's MSN Chinese web portal plus tense relations with the Chinese government, Microsoft continues to invest in the east. Microsoft knows the market is too big to ignore despite its lack of success there till date. Therefore, the tech company has partnered with the likes of Baidu (NSDQ:BIDU), Lenovo Group (OTC:LNVGY) and Xiaomi in an attempt to accelerate sales of Windows 10 in the country. This is something US multi-nationals have had to do since whistle-blower Edward Snowden exposed how the US was using technology to spy on other countries. To get around this, Microsoft has stated that it will open a new transparency center in Beijing. The aim of this center would be to enable experts from the Chinese government try out Microsoft's products and test them in whatever way they please. The underlying issue here is trust. This market will eventually open up as Huawei is facing similar trust issues in the US. Something will eventually give. Microsoft wants to be first in line when the Chinese start giving out government contracts to foreign tech companies.
Cloud Growth Will Offset Declines In Other Areas Of the Business
The Microsoft cloud is a key component of protecting the downside in the stock as it is well established and is holding its own in second place behind Amazon's AWS system. Combine this with the billion plus Microsoft Office users in the world and you have a partnership well suited for individuals and businesses alike. I see the vast majority of these users migrating their activities to the Microsoft Cloud instead of competing ones. Why? Well, you just have to look at Microsoft's competitor Alphabet Inc's (NSDQ:GOOG) Google which launched its own version of cloud way before Microsoft but still hasn't really taken a lot of market share off Microsoft with regards to its software offerings. Furthermore, the versatility and flexibility of Azure is definitely up there with the best. Along with office365 it also hosts ERP, Power BI and Dynamics CRM to name just a few. At present, Azure is definitely growing as fast as Amazon's AWS if not closing the gap. IT infrastructure in businesses will soon be a thing of the past. Microsoft has flagged this and will look to take advantage when the real transition takes place.
To sum up, Microsoft's recent dividend hike and share repurchase program definitely came as a welcome boost for shareholders. In the tech industry, Microsoft definitely has one of the best balance sheets in the industry. Its cash position has enabled the company to go on an acquisition spree over the past few quarters. The beam acquisition, in particular, could turn out to be a game-changer in the gaming space. Furthermore, the company wants to make big inroads in China which is crucial for its long-term growth aspirations. Adding everything else up along with the growth in the Microsoft Cloud, Microsoft stock should take out $60 levels before long.