It has the most variety and the most money.
Microsoft (MSFT 4.20%) wasn’t immune to the sell-off of tech stocks last year. However, its 28.7% drop was more than 4 percentage points better than the Nasdaq Composite‘s 33% drop.
Not only does Microsoft fall less than the Nasdaq when the market is down, but the stock has also beaten the index by a wide margin over the last three, five, and ten years.
How does Microsoft win so often with so little risk? We can learn a lot from how its most recent earnings report broke down its income.
There is variety between business lines.
Even though Microsoft focuses a lot on cloud services and server products, which are growing quickly, no one category makes up more than 50% of the business. Microsoft also has different divisions for software, hardware, business products and services, and consumer products and services.
You can see that the consumer-focused segments dropped last quarter. After people stocked up on PCs and video games during the pandemic in 2020 and 2021, sales have dropped quickly since the end of the pandemic. But on the other hand, the more regular cloud-based enterprise divisions grew even though the Federal Reserve’s rapid interest rate hikes caused the economy to slow down.
Microsoft’s many ways to make money make it stand out from other big tech companies, which usually have one big product or service.
And the fastest growth is in the biggest division.
Another important thing to note is that Microsoft’s biggest division is also the one that is growing the fastest. The server products and cloud services division makes up 34% of sales and is growing 19.6%.
Microsoft’s Azure cloud platform and infrastructure services climbed by 31% over the previous quarter. They belong to this group. The cloud infrastructure industry is still a terrific place to be in business, even though Microsoft and other cloud providers forecast a slowdown in the first half of 2023 as clients try to maximize their cloud investment.
Most analysts believe that the switch from on-premises data centres to the better cloud model is still in its early to middle stages. Verified Market Research says that the cloud infrastructure market will grow at an annualized rate in the mid-teens to high-teens until the end of 2030. Microsoft is one of only a few companies that stand to benefit from this growth.
When a company’s biggest division is growing the fastest, that should keep the growth rate steady for the next few years as that division’s share of revenue grows.
And all or most of the divisions make money.
Lastly, not every segment listed above may be profitable, but most of them are. Microsoft doesn’t break down the operating income of each division, but it does group them into three large groups: productivity and business processes, intelligent cloud, and more personal computing.
Microsoft does show how profitable these three larger categories are as a whole, and even when consumer and PC sales were down last quarter, Microsoft made money in all three:
Adding it up
Microsoft is a relatively stable company because it has many diverse revenue streams. Its dominant position in the cloud computing business ought to contribute to the continued growth of those profits.
Microsoft is able to invest in new and exciting innovations like ChatGPT’s parent company, OpenAI because it has a wide range of businesses and is making more money. At the same time, it can give cash back to shareholders through dividends and buying back shares. Due to this potent mix, Microsoft is currently the most secure of the major computer firms.