Global Equities

Stock story: Microsoft

Microsoft is a household name. But it’s the company’s dominance of the business world that matters.

Microsoft, which generated US$92 billion in sales in fiscal 2016, has been a household name for more than four decades because just about everyone has used Microsoft software.

Ironically for a company so well known for its consumer-targeted Windows software, games and entertainment Xbox and Bing search engine, the majority of Microsoft’s earnings come from products sold to businesses. These leading products include Microsoft Office (about 45% of earnings) and data-centre products (about 35% of earnings).

All up, we estimate that about 80% of Microsoft’s earnings are sourced from its entrenched business customers. The Windows PC operating system remains critical to business operations globally, Microsoft Office has more than 90% market share of workplace-related software globally, while Microsoft’s data-centre-software products are protected by barriers such as the cost of switching to competitor products. To keep businesses with Microsoft, the company has built hyper-cloud Azure that is proving popular.

While the characteristics of Microsoft’s smaller consumer business are less attractive, the company established by Bill Gates and Paul Allen in 1975 is trying to make this arm more profitable by offering services such as the app store, content, gaming and search advertising.

But it’s Microsoft’s entrenched enterprise software business that is expected to drive the bulk of earnings in coming years and keep the company among the world’s biggest stocks by market cap.

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