How Important Is The Intelligent Cloud Segment To Microsoft’s Stock?

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Microsoft’s (NASDAQ: MSFT) Intelligent Cloud business is expected to contribute $41.9 billion to Microsoft’s 2020 revenues (ending June 2020) – representing 31.2% of Microsoft’s $290.4 billion in expected revenues for the year. More Personal Computing, and Productivity & Business Processes segments are expected to contribute 35.1% and 33.7% respectively to Total Revenue – making the relative contribution of all the 3 reporting segments to Microsoft’s top line nearly identical. Notably, Microsoft is expected to add $37.8 billion in revenue between 2017 to 2020, out of which the Intelligent Cloud segment is expected to provide $14.5 billion, or 38.3% of the total expected increase. In fact, it is the strong growth in Microsoft’s Intelligent Cloud segment revenues that has been primarily responsible for the 200% jump in the tech giant’s stock since 2017. While the segment has considerable growth potential, its higher profit margins have unlocked sizable value over recent years. We discuss Microsoft’s valuation analysis in full, separately.

Below we discuss Microsoft’s business model, followed by sections that review past performance and 2020 expectations for Microsoft’s revenue drivers and competitive comparisons of its revenue with Apple and Oracle. You can look at our interactive dashboard analysis ~ Microsoft’s Revenues: How Does Microsoft Make Money? ~ for more details.

Microsoft Business Model

What does Microsoft offer:

Microsoft is a technology company that makes money from the sale of software and hardware for consumer and enterprises.
Their products include operating systems; cross-device productivity applications; server applications; business solution applications; desktop and server management tools; software development tools; and video games.
They also design, manufacture, and sell devices, including PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories.
Has 3 major Operating Segments:

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More Personal Computing: Segment revenue is derived from the sale of operating systems, devices, gaming offerings and search products.
Intelligent cloud: Segment revenue is derived from the sale of public, private and hybrid server products and related cloud services.
Productivity and Business Processes: Segment revenue is derived from the sale of subscription to Office, revenues from LinkedIn and from Microsoft’s on premise and cloud (Dynamics 365) enterprise solutions (including CRM and ERP).
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What Are The Alternatives?

Microsoft competes with:

Apple and open source players in the office productivity and operating systems business
Amazon, Google and IBM in cloud
Amazon and Google in search
Electronic Arts, Activision Blizzard and Google in Gaming
Oracle, SAP and Amazon in databases and enterprise systems.
What Is The Basis of Competition?

The industry is a fast evolving and companies compete on the basis of change and disruptive technologies and frequent introductions of new products and services. The ability to remain competitive in the market depends on the company’s success in making innovative products, devices, and services that appeal to businesses and consumers.

Details about how Microsoft revenue changes over recent years compare with competitors Apple and Oracle are available in our interactive dashboard.

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Total Revenue has grown from $96.6 billion in 2017 to $125.8 billion in 2019 primarily pushed by the Cloud and Business processes segment. Trefis estimates further growth of about 6.7% and revenue to reach $134.3 billion in 2020 (ended June 2020).
More Personal Computing segment has seen revenues grow from $39.3 billion in 2017 to $45.7 billion in 2019. Trefis estimates further growth of about 3.2% and revenue to reach $47.2 billion in 2020.
Intelligent Cloud segment has seen the highest increase in absolute as well as percentage terms among Microsoft’s segments. The segment revenue increased from $27.4 billion in 2017 to $39 billion in 2019. Trefis estimates growth of about 7.4% in 2020 with revenue for the segment reaching $41.9 billion.