How the cloud is driving Microsoft stock higher

Microsoft (MSFT -4.18%) is the second largest company in the world, with a market capitalization of $2.1 trillion. It is best known for its software products, such as the Windows operating system and the Office 365 suite, which are used by billions of people around the world.

But it takes operational diversity to build a company of this size. Although Microsoft has gained incredible brand recognition through its consumer-facing products and services, its largest revenue segment also serves businesses.

That segment is cloud computing, and it’s an industry that could be worth more than $1.5 trillion a year by 2030. Here’s how it’s driving Microsoft’s growth.

Image source: Getty Images.

Get ahead of the rest of the company

Cloud services have become essential as they allow companies to move their operations online, connecting teams across borders. It even transformed the way people use core Microsoft products like Office 365, which now offers powerful collaboration capabilities.

Microsoft’s flagship cloud platform is called Azure and is used by 95% of Fortune 500 companies for various purposes. Azure offers more than 200 products and 40 solutions ranging from data storage to artificial intelligence tools to cybersecurity, and it is the key driver of Microsoft’s Intelligent Cloud business segment.

Cloud revenue exceeds overall company revenue, taking over from Microsoft’s other two major segments.

A chart showing Microsoft's cloud revenue.

As a result, the cloud has grown over time to become the largest component of Microsoft’s total business accounting for the lion’s share of revenue. If the cloud continues to overtake Microsoft’s other two business segments, its share of the company’s overall revenue will only grow further.

A chart showing Microsoft's business segments.

The bigger picture could be even more revealing. Given that the broader cloud industry is expected to grow 15.7% annually through 2030, the fact that Microsoft’s cloud business is dwarfing even that rate suggests the company is rapidly taking more market share. every year.

Microsoft is always innovating for consumers

Aside from cloud computing, Microsoft’s consumer-facing business is still critical, especially in hardware, as this is an area where the company has historically struggled. Microsoft’s Surface brand makes tablets and laptops, and the Xbox game console is a global powerhouse. Both are billion dollar companies in their own right.

But Microsoft is trying to lean even more into the game with its planned acquisition of ActivisionBlizzard for nearly $69 billion earlier this year. The deal isn’t done yet, but it could give Microsoft a leg up on its biggest gaming competitor sony, which manufactures the PlayStation console. Activision Blizzard makes some of the most popular gaming titles in the world, including Call of Duty and World of Warcraft.

Over the long term, Microsoft’s diversified businesses make it a big part of any investment portfolio. It provides exposure to both consumers and the corporate world; Moreover, financially, the company is a powerhouse. Analysts expect it to generate more than $199 billion in revenue for the 2022 fiscal year ending June 30. And from a profitability standpoint, it could generate $9.33 in earnings per share, assuming it meets fiscal fourth-quarter estimates.

This puts Microsoft stock at a price/earnings multiple of 30, slightly cheaper than the Nasdaq 100 index, which is trading at a multiple of 31 right now. But given how good Microsoft is as a company, there’s an argument that it should be trading at a premium, which leaves plenty of room for upside potential, especially in the long run.

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