Microsoft

From traffic offender to multi-billionaire

Are you reading this article on your phone, or are you sitting in front of your computer right now? While the smartphone operating system market is clearly dominated by Android (Google) and iOS (Apple), in the desktop space there's one monopolist leading by a wide margin - Windows (Microsoft). That number is indeed declining, but 8 out of 10 computers currently still run Bill Gates' operating system. But today Microsoft is much more than "just" Windows. The cloud business is growing enormously right now, and with artificial intelligence the high-tech company has positioned itself perfectly for the future.

After the dot-com bubble burst, the computer stock took a very long time to climb again. During that time only very few people believed in Microsoft's future, and the stock moved sideways. It took a full 17 years to surpass the old all-time high from December 1999. Since 2013, though, business has been running like clockwork again. Reason enough for us to take a more in-depth look at the company today.

The history and business model of Microsoft Corp.

In October 1955, William “Bill” Henry Gates III was born in Seattle. His father was a renowned attorney and his mother worked as a teacher. He grew up in a wealthy neighborhood and was raised to be an ambitious boy from quite an early age. His parents trained his competitive spirit with various games. In school, his teachers quickly noticed that Bill was much more gifted than his classmates. His IQ was estimated at an impressive 160. When he attended Lakeside School, you'd usually find him in the computer room with his new friend Paul Allen. Back then computers were still huge and not suitable for home use. Bill was fascinated by these machines and learned everything about his new hobby. He quickly learned to program and finished his first own software program: Tic-Tac-Toe. At just 14 years old, he founded the software company Traf-O-Data together with Paul. Their first job was a system for measuring traffic flows, programmed on an Intel chip, which brought in $20,000. Shortly afterwards came a class scheduling software that saved their teachers a lot of time and nerves.

In 1973 Bill moved to the East Coast to Boston to study law at Harvard University. His parents didn't believe in this newfangled computer stuff and wanted him to follow in his father's footsteps. He, on the other hand, recognized the countless opportunities computers would open up in the near future. In December 1974 the manufacturer MITS launched the Altair 8800, the first home computer. However, the machines were shipped without an operating system. Bill and Paul saw their chance, developed a usable system within a few weeks and submitted it to the manufacturer. A few months later they founded the company Microsoft Corporation (short for: Microcomputer Software). For this, Bill dropped out of college and moved with Paul to Albuquerque, New Mexico. By the way, the picture above shows 22-year-old Bill after he was arrested for speeding. He said he found it easier to switch off while driving. In the same year as the arrest, 1977, Texas Instruments, Apple Computers, Commodore and Radio Shack launched their own home computers with the Microsoft Basic operating system. While they opened their first sales office in Japan in 1978, the company's annual revenue crossed the million mark for the first time. A year later the operating system was already running on 200,000 computers and revenue had doubled. In addition to a big contract from IBM, the team was also working on the new Windows 1.0 system. Later came the first hardware products, such as a computer mouse. The business grew rapidly, and the company kept surprising everyone with new innovations.

Today Microsoft is undisputedly one of the global players in the PC business. Its business can mainly be divided into 3 segments: consumers (Windows, Xbox, Bing, Surface computers), productivity (Office programs, LinkedIn, Skype, GitHub) and the cloud/server business (Azure, OneDrive, SQL Server). So it's broadly diversified, which makes it easier to weather weaker market phases. Annual revenue for 2019 came to around $126 billion.

How will business go from here?

One thing you can say for sure: things won't get boring at Microsoft anytime soon. I think we're still in our infancy when it comes to the Internet of Things, artificial intelligence, cloud solutions and computers in general. Just how fast the cloud business is growing right now makes shareholders' hearts beat faster. Total profit for the fiscal quarter ending in September climbed 21 percent to $10.7 billion. Revenue from cloud services alone grew by an impressive 30 percent. Most recently the company landed a huge contract from the Pentagon. It's supposed to completely overhaul and modernize the entire IT landscape of the US Department of Defense.

Sales of the new Surface models started in October. In the course of next week (11/19/2019), the Surface Pro X is also supposed to hit the market. Business is going great here too: most recently profits rose by 26 percent. In this chart (click here) you can see the long-term rising revenue from Microsoft's Surface tablets. The new sales figures aren't included yet. Step by step the company will end support for old Windows 7 computers, so sooner or later they'll upgrade to the newer Windows 10. Especially with a changeover like that, it can be worth getting a newer device.

With its Office programs, Microsoft is currently moving to a subscription model. For the company that means recurring and, above all, more predictable revenue. It makes a lot of money here mainly with business customers - Outlook, Word, Excel and PowerPoint are simply an indispensable part of everyday office life.

Also worth mentioning is Microsoft's plan to get back into the smartphone business. When it took over Nokia's mobile phone division in 2013, it was still full of euphoria. Unfortunately, though, that very acquisition turned out to be a flop. But giving up isn't an option for the company, so it's currently working on the foldable dual-screen smartphone Surface Duo. It's supposed to hit the market at the end of 2020.

And how's it going with the dividend?

Similar to Amgen last week, Microsoft also needed a certain amount of time to stabilize its business before paying a dividend. Since 2003, though, investors have been able to enjoy a share of the profits. And since then it has been raised year after year. The dividend growth rate over the last 10 years averages a decent 14.6%. That makes the current dividend yield of 1.2% look not so bad at all. The high-tech company has also approved a share buyback program, which should surely give the stock price a further boost.

Conclusion:
Wow, what a company. I have to admit that (apart from work) I use Apple products almost exclusively - luckily I have them in my portfolio too. Microsoft is also a really rock-solid company, and I'm totally fascinated by its founder Bill Gates in particular. At this point I'd also like to quickly recommend the documentary series Inside Bill's Brain.