Dear Reader,
Microsoft announced net income of 10.752 billion USD on revenue of 35.021 billion USD in the first quarter of 2020 compared with profit of 8.809 billion of USD on revenue of 30.571 billion USD in the first three months of 2019.
As can be seen revenue in the first quarter of 2020 grew by 14.56% year on year and profit increased handsomely also. Microsoft, driven by its cloud computing and MS Office and MS Windows business, is powering ahead in terms of revenue and profitability. Cloud infrastructure as a service is now a 100 billion USD a year business of which Microsoft has a 15% share, second only to Amazon's circa 32% share. I estimate cloud infrastructure as a service could grow to a 400 billion USD a year market by 2030. If Microsoft keeps its share of 15%, which would mean 60 billion USD of annual revenue with a profit margin of 33% will provide a profit of 20 billion USD for Microsoft.
However, Microsoft is valued at 1.32 trillion USD by public markets as of today. In my opinion, Microsoft's real intrinsic value is around 800 billion USD. Why? Microsoft is trading at Price/Sales ratio of 10 and trailing Price/Earnings ratio of 30. Simply put, by these valuation metrics Microsoft is grossly overvalued. Even if the cloud computing business eventually surpasses the already high expectations by a reasonable margin, Microsoft's future expected revenue and a 30% net profit margin, which is a lofty assumption, will not be able to justify its current valuation.
What is more, we are in a coronavirus disease COVID-19 pandemic lockdown. Yes, people are spending more time at home, but they are spending approximately the same amount of time using computers and working with MS Office. Yes, the demand for cloud computing services could rise, but the forecasted increase, according to me, is not enough to justify a mid-term valuation of more than 800 billion USD for Microsoft.
Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn, Facebook etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed on the blog are Petar Posledovich's. Petar Posledovich does not guarantee the accuracy of the information presented on this blog and social networks. The information presented is "as is".
Petar Vladimirov Posledovich is not liable for any investment losses incurred by reading and interpreting blogposts on this blog and posts on social networks.
Conflicts of interest: I may possess some of the securities, currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!
Respectfully yours,
Petar Posledovich
No comments:
Post a Comment