Microsoft’s bright outlook

InvestGS
InvestGS
Sep 4, 2018 · 7 min read

The last 24 months have been quite interesting for Microsoft. On one hand it acquired companies that were leader in their segment (LinkedIn and GitHub) and on the other hand it became a very strong player in the cloud industry. In the following article, we review the potential LinkedIn’s and GitHub’s acquisitions have and we take a deeper look at its cloud activities.

Microsoft’s logo

Strategic acquisitions

After acquiring Nokia in 2014 and basically failing to take advantage of any of its capabilities to become a dominant player in the smartphone space, some analysts were worried when Microsoft announced it bought LinkedIn (back in 2016) for over $26 billion. Word was that it overpaid LinkedIn and that the market they were in was not attractive for Microsoft.

The LinkedIn acquistion

However, the market has evolved and the doomsday scenarios did not occur. Facebook did not enter the social-work space (besides Workplace by Facebook) and LinkedIn is actually turning strong revenues for Microsoft (LinkedIn’s revenue was of over $1.4 billion for the Q4 of 2018). Besides turning a revenue for Microsoft, LinkedIn is strategically important for Microsoft as it enables it to:

  • Get access to millions of corporate users (and their data) and showcase them their products (Microsft Cloud, the Office suite, the Surface laptops). On top of that, LinkedIn enables recruiters to pay a fee to find candidates for the jobs they have to fill, users can pay for a premium account and companies can advertise their products and services on the social network.
  • Take possession of the learning platform LinkedIn bought back in 2015, Lynda. As PluralSight recently went public and is now valuead at over $4.5 billion (as of September 3rd 2018), we can totally imagine that Lynda and online education are only going to grow in the future. This will add considerable value to LinkedIn and thus to Microsoft as a whole.

Simply put, the LinkedIn acquisitions unlocked unforeseen areas of growth for Microsoft as online courses such as Lynda are growing and the market for data harvesting through social networks is starting to stabilise itself (Xing and angelList never really took off). By using the platform in a smart way, Microsoft could tap into the corporate social network by selling them its cloud services, search services through Bing, its hardware and its apps.

GitHub’s acquisition

During the summer of 2018, Microsoft made the somehow suprising move to buy GitHub. Founded in 2008, this platform enables developers to host and review code, manage projects and build software. Over 28 million developers and 1.8 million companies and organizations currently rely on the service. Even though it might be surprising for a company such as Microsoft to buy GitHub, there is some very interesting potential in these two companies to merge with each other, especially after the LinkedIn acquisition:

  • According to a report by McKinsey, automation could affect 50% of today’s jobs, putting over 1.2 billion employees at risk. However, the demand for people with technological skills will only grow and become an increasingly profitable pool of individuals. By acquiring GitHub, Microsoft is locking for itself this pool of developers and could develop new features for the platform. For example, it could ad LinkedIn-like services to GitHub and cross-integrate GitHub to LinkedIn.
  • As mentionned in the LinkedIn case, online education is booming as it is being developed by leading universities such as Stanford and Harvard but also by private companies such as Coursera, Udacity, CodeSchool and other organizations. As most developers and aspiring developers are on GitHub, Microsoft could develop a Lynda-like platform on which developers could rely, not only to collaborate on their code, but also to learn while doing.

By buying GitHub, Microsoft in anchoring itself in the world of the developers and coders. We see tremendous opportunities for leveraging the experience it made with LinkedIn and apply it to GitHub. As online education is only getting started and technological jobs are on the rise, Microsoft is well positioned in the market to take advantage of the coming changes.

Microsoft Azure

Recently, various analysts have pointed to the growing share Microsoft is getting in the cloud market through its Azure cloud centers. These capabilities have become a key asset for Microsoft’s turnaround as its cloud products grew more than 91% in 2017–2018 and is set to further grow as this market is set to reach over $411 billion by 2020. Furthermore, reading Microsoft’s last quarterly earnings, one will note that their margins are improving while they are able to undercut Amazon’s AWS prices (we should also point out that Amazon’s AWS represents a major part of its revenues).

Indeed, prices are important for cloud customers as Microsoft managed to attract a giant such as Walmart to its cloud facilities as this customer complained that Amazon was subsidizing its e-commerce services with high prices from AWS.

Microsoft’s “other” activities

Besides high-growth activities, one should not forget the bread and butter of this giant company. Their Office 365 suite continues to grow, they are still one of the major players in the gaming industry with their Xbox (and set to benefit from the rise of e-sports), their Surface laptops are becoming increasingly attractive and also increasing in sales and finally, they are developping serious capabilities in the Artifical Intelligence area. We take a deeper look at the most interesting financial figures hereunder:

Microsoft’s Q4 2018
Microsoft’s Q4 2018

Taken from their Q4 2018 earning call, these 2 slides resume well how strong their gaming, search and devices businesses are evolving. Mixed with their forward looking activities such as the development of LinkedIn, GitHub, their Cloud data centers and their AI capabilities, we can conclude that Microsoft is well poised for growth.

Sources

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