Microsoft’s Enterprise World Dominance Creates Long-Term Value

Here’s the story of Microsoft Corporation (NASDAQ: MSFT) over the last decade or so: Apple’s (NASDAQ: AAPL) brilliant innovation drove Microsoft into oblivion.

After it reported its fourth quarter fiscal year 2016 earnings, however, it’s safe to say the next decade will see Microsoft drive itself back into relevance.

For starters, Microsoft reported earnings of 69 cent per share on revenue of $22.61 billion. Wall Street’s expectations were that MSFT would report earnings of 58 cents on a revenue of $22.15.

The highlight of the past decade features how Microsoft notoriously failed to be relevant in the smartphone revolution. When it would enter, it acquired Nokia’s mobile segment. By standards of the success that the smartphone market has seen, the acquisition of Nokia mobile has been mostly forgettable.

The decline that PC sales have witnessed as mobile grew made things worse for Microsoft. Microsoft’s long-term debt also skyrocketed during this period in a bid to reverse the situation of things. After all, businesses usually take on loans to remain competitive. However, the efforts hadn’t been fruitful.

But, it’s time to forget about these issues and the disappointing foray into the smartphone market – or the lack of it.

Here’s what will make Microsoft relevant again.

Microsoft – Owning the enterprise world

Microsoft is probably not going to be socially “cool” like Alphabet (NASDAQ: GOOG) and Facebook (NASDAQ: FB).

The struggling PC business, which has been hugely important to Microsoft, has probably caused many to forget Microsoft’s biggest strength – its dominance in the enterprise world.

However, the latest earnings release from the company come as a reminder that Microsoft is a leader in the enterprise world – through the performance of its cloud business.

Microsoft said in the June quarter report that its cloud business now has an annual run rate of $12.1 billion. It is looking increasingly likely that it would achieve its ambitious run rate target of $20 billion by fiscal year 2018.

In fact, Statista checked and found that, if Microsoft maintains its current growth rate in its cloud business, it might achieve its target by the end of its current fiscal year – 2017. As a reminder, Microsoft’s fiscal year runs from July to June.

Microsoft's Enterprise World Dominance

Execs said during the earnings call that the growth here stems from its huge position in the professional space. And its dominance of the enterprise world will help it return to relevance.

Its wide moat in the enterprise market means that it won’t be caught in the race to cut prices as competition grows in the industry. Microsoft just doesn’t offer could services like Google. It brands itself as a “hybrid and hyperscale cloud” service provider.

This means that Microsoft’s cloud offering is vertically integrated. This creates a barrier to exit for customers, as it would be easier and cheaper overall to have all their cloud properties in one place as opposed to in a number of locations with different paying plans.

By implication, Microsoft has a good chance of making its cloud business a high-margin one.

Moreover, over the long term, Microsoft has the chance to outmuscle its biggest competitor, Amazon (AMZN) on a global scale as Microsoft is definitely more popular among enterprises worldwide than Amazon. Most of them rely tremendously on Microsoft to run their businesses efficiently.

Bottom line

Microsoft might not have the social cool that Google and Facebook have. However, it definitely holds a value, which is strong enough to from an investment thesis – it owns the enterprise world, at least as far as computing goes.