msft investment thesis

Compounder Fund: Microsoft Investment Thesis

Compounder fund: microsoft investment thesis - 30 sep 2020.

Data as of 29 September 2020

Microsoft Corporation (NASDAQ: MSFT) is one of the 40 companies in Compounder Fund’s initial portfolio . This article describes our investment thesis for the company.

Company description

Founded in 1975 by Bill Gates and Paul Allen, Microsoft has grown to become a tech juggernaut and one of the largest companies in the world by market capitalisation. At its 29 September 2020 share price of US$210, Microsoft’s market cap was a staggering US$1.57 trillion. 

Much has changed about Microsoft’s business. In the past, the company was largely reliant on selling its productivity software tools to consumers and businesses, and its Windows operating system software to manufacturers of personal computers. Today, there’s so much more to Microsoft’s business. 

In its fiscal year ended 30 June 2020 (FY2020), Microsoft earned US$143.0 billion in revenue from its three operating segments: Productivity and Business Processes; Intelligent Cloud; and More Personal Computing. The revenue contributions from the three segments are evenly split, and they can be seen in the table below:

Each of Microsoft’s operating segments can be further split into multiple sub-segments. The following are brief descriptions of what these sub-segments are: 

• Office Commercial , which includes Office 365 subscriptions, the Office portion of Microsoft 365 Commercial subscriptions, and on-premise licenses of the Office software. You can think of these as software that improves personal, team, and organisational productivity. There’s an ongoing effort by Microsoft to shift Office on-premise licenses to Office 365 Commercial subscriptions.
• Office Consumer , which includes many of the above software, but with versions focused on individual consumer use. In a similar manner to the Office Commercial sub-segment, Microsoft is continuing to shift consumer Office software licenses to the consumer version of the 365 subscriptions (named Microsoft 365 Consumer). The Office Consumer segment also contains Skype, Outlook.com, and OneDrive services, which are driven by subscriptions, advertising, and the sale of minutes.
• Linkedin is a professional network on the Internet for people to display their professional experience (there are currently over 700 million members on LinkedIn) and for companies to share their profiles. LinkedIn provides paid subscriptions to (1) tools to help organisations hire and develop talent, grow skillsets, and sell better online, and (2) tools for individuals to manage their professional identity and grow their network. LinkedIn also provides a paid online marketing service.
• Dynamics , which provides cloud-based and on-premise software for financial management, enterprise resource planning (ERP), customer relationship management, supply chain management, and application development platforms for both large and small companies. The Dynamics sub-segment is also shifting from on-premise software products to its cloud-based Dynamics 365 solution.
• Server Products that include SQL Server, Windows Server, Visual Studio, System Center, and GitHub. These are mostly server software, integrated server infrastructure, and middleware designed to support software applications built on Windows Server operating systems. Github, which Microsoft acquired in 2018 for US$7.5 billion (paid in Microsoft shares), is an open-source collaboration platform for software developers. Revenue sources for the Server Products sub-segment include sales of volume licensing programs and licenses to OEMs (original equipment manufacturers).
• Cloud Services , which consists of Azure. Essentially, Azure is a cloud-computing service and it can be used for “computing, networking, storage, mobile and web application services, AI [artificial intelligence], IoT [internet of things], cognitive services, and machine learning.” Customers are charged based on consumption or number of users.
• Enterprise Services , where Microsoft helps its enterprise customers in deploying its server and desktop solutions, among other support services.
• Windows , which is the most widely used operating system (OS) on personal computers. This segment depends on the purchase of the Windows OS licenses by (1) device manufacturers to pre-install on the devices they sell, and (2) commercial clients.
• Devices , which involves the sale of devices that are designed and manufactured by the company, including the Surface product and other intelligent devices.
• Gaming , which houses (1) the Xbox family of video gaming consoles, (2) video gaming-related streaming services, (3) Xbox Game Studios, a creator of video games, and (4) Xbox Live, a platform for gamers to connect and share their gaming experience. Revenue from the Gaming sub-segment comes from subscriptions, sales of first- and third-party content, and advertising.
• Search , where Microsoft monetises its Bing online search engine through online advertising services. This sub-segment also houses the Microsoft Advertising online advertising service.

Here’s a more granular breakdown of Microsoft’s total revenue in FY2020 by product and service:

Microsoft groups all its cloud-related businesses under the Commercial Cloud banner. These businesses include Office 365 Commercial, Azure, the commercial portion of LinkedIn, Dynamics 365, and more (in the table just above, they are primarily included in Server products and cloud services, Office products and cloud services, and LinkedIn). In FY2020, Commercial Cloud’s revenue was US$51.7 billion, around 36% of Microsoft’s total revenue for the year.

Microsoft also has a fairly diversified business from a geographical perspective. In FY2020, 51% of the company’s revenue came from the USA while the remaining 49% originated from other countries across the world. 

Investment thesis

We have laid out our investment framework in Compounder Fund’s website. We will use the framework to describe our investment thesis for Microsoft .

1. Revenues that are small in relation to a large and/or growing market, or revenues that are large in a fast-growing market

As you saw in the “Company description” section of this article, Microsoft has a highly diversified business. In discussing Microsoft’s market opportunities, we will focus on three areas: (1) Azure, (2) Office 365, and (3) the video gaming business of Microsoft.

Azure is one of Microsoft’s fastest-growing products. Although Microsoft does not release revenue numbers for Azure, it does share the growth rates of the cloud computing business. The table below shows Azure’s impressive year-on-year revenue growth rates over the last few years.

Despite the heady growth Azure has experienced, we still see significant room for the cloud computing service to grow. The cloud computing market is expanding rapidly. According to market researcher Gartner, the cloud PaaS (platform-as-a-service) and cloud IaaS (infrastructure-as-a-service) markets are expected to collectively be US$132 billion in 2022, up 22% annually from US$59 billion in 2018. Azure currently participates in both the cloud PaaS and cloud IaaS markets. And importantly, Azure has been adept at winning market share. According to estimates from research outfit Canalys,  Azure held 20% of the global cloud computing overall infrastructure market in the second quarter of 2020, up from 18% a year ago, and up from 13.5% in 2017. 

In the global cloud computing overall infrastructure market, the top three players are, in descending order, AWS (Amazon Web Services), Azure, and Google Cloud. AWS has a commanding lead with its market share of 31% in the second quarter of 2020 according to Canalys; Google Cloud is a distant third with its market share of 6%. Azure is up against tough competition, no doubt. But we think a rising tide can lift some boats in this case, Azure included. The cloud computing infrastructure services providers with the largest scale are able to offer users lower costs and a better overall experience. Azure is one of the clear leaders in this space, and so should benefit from the growing need for cloud computing infrastructure services.

According to Bitglass, Office 365 reigns supreme in the cloud productivity software market. In 2019, Office 365 had a 79% adoption rate compared to key rival Google G-Suite’s 33% adoption rate. The number of consumer subscribers to Office 365 has also grown from just 7 million in the first quarter of FY2015 to 42.7 million in the fourth quarter of FY2020.

The market opportunity for Office 365 is still growing fast. According to Adroit Market Research, the productivity software market is expected to grow at 16.5% annually from 2018 to hit US$96 billion by 2025. Office 365 looks set to benefit from this growing addressable market.

Microsoft’s gaming business saw its revenue inch up by just 6% per year from US$9.2 billion in FY2016 to US$11.6 billion in FY2020. But the fourth quarter of FY2020 saw gaming revenue surge 64% from a year ago, with stay-at-home guidelines to combat the current COVID-19 pandemic boosting demand for Microsoft’s gaming products and services.

The opportunity ahead is intriguing to us. The global gaming market was US$109 billion in 2019, up 3% from US$106 billion in 2018, according to Nielsen’s SuperData Research Group. We won’t be surprised if Microsoft ends up pursuing a gaming-as-a-service strategy in the future. There are already early signs of this happening with Microsoft launching its game streaming service, Project xCloud, earlier this month. During Microsoft’s FY2020 fourth-quarter earnings conference call, CEO Satya Nadella also teased his ambitions for the company’s gaming business:

“This gaming TAM [total addressable market] is much more expansive than we participated in, even with all the success we have with Xbox. We think going forward, Xbox with the approach we are taking has much more of an ability to reach the 2+ billion gamers out there and we’re in the early days of building that out.”

2. A strong balance sheet with minimal or a reasonable amount of debt

Microsoft has a robust balance sheet that is flush with cash. As of 30 June 2020, it had US$136.5 billion in cash and short-term investments compared to US$63.3 billion in debt. This puts Microsoft in a net-cash position of around US$73.3 billion, which gives it massive financial firepower to continue investing in the business or return capital to shareholders through dividends and buybacks. It helps too that Microsoft has a great track record of generating free cash flow from its business for a long time, which we will discuss later. 

Microsoft’s strong balance sheet is made all the more impressive given the fact that the company has been very aggressively buying back shares and paying dividends. For perspective, Microsoft has spent a total of US$95.4 billion and US$74.4 billion to buy back shares and pay dividends, respectively, from FY2015 to FY2020.

3. A management team with integrity, capability, and an innovative mindset

On integrity

Microsoft is led by CEO Satya Nadella, who took over the hot seat in February 2014. The other key leaders in Microsoft include Amy Hood, Jean-Philippe Courtois, and Brad Smith. The table below shows more details on the four of them and there are two positive and striking things to note: (1) They are mostly all relatively young, and (2) each of them have long tenure with Microsoft.

We think that the compensation structure for Microsoft’s leadership demonstrates integrity. Here are a few key data points:

• In FY2019, Nadella was the highest paid executive in Microsoft and his total compensation was a princely US$42.9 million. But this is a rounding error when compared to Microsoft’s profit of US$39.2 billion in the same year.
• 69% of Nadella’s total compensation in FY2019 came from stock awards that vest over four years and performance stock awards (PSAs). The PSAs are based on (1)  three-year growth in Microsoft’s business metrics that make sense to us, such as Commercial Cloud revenue and Commercial Cloud subscribers, among others, and (2) Microsoft’s three-year total shareholder return compared to the other components in the S&P 500. So what this means is that the lion’s share of Nadella’s compensation in FY2019 depended on the long-term growth of Microsoft’s stock price as well as important business metrics.
• 25% of Nadella’s total compensation in FY2019 came from cash incentives that are based on the company hitting certain sensible goals, both financial (in terms of revenue and operating income) and qualitative (in areas such as product & strategy, customers & stakeholders, and culture & organizational leadership).
• The total compensation for Hood, Courtois, and Smith in FY2019 was US$20.2 million, US$15.1 million, and US$17.4 million, respectively. Around 75% of each sum came from stock awards and PSAs with the same features as Nadella’s. 

Moreover, there’s a high level of insider ownership at Microsoft, which strengthens our view that Microsoft’s leaders are in the same boat as the company’s other shareholders. As of 8 October 2019, Nadella owned 951,502 Microsoft shares and had an additional 1.457 million shares that vest over time. His directly-held stake alone is worth more than US$199 million at Microsoft’s 29 September 2020 share price of US$210 while his total stake is worth half a billion US dollars.

On capability and innovation

We rate Satya Nadella very highly on capability and innovation, and we think he has done a tremendous job at transitioning Microsoft from a company that mostly sells software licenses to one built for the cloud. There are a few things about Nadella’s tenure as Microsoft’s CEO that we want to discuss.

First is the transformation of Microsoft’s people culture under Nadella. In September 2017, Fast Company published an excellent feature on Microsoft’s CEO titled Satya Nadella Rewrites Microsoft’s Code . Here’re some relevant excerpts from the article:

“One of Nadella’s first acts after becoming CEO, in February 2014, was to ask the company’s top executives to read Marshall Rosenberg’s Nonviolent Communication , a treatise on empathic collaboration. The gesture signaled that Nadella planned to run the company differently from his well-known predecessors, Bill Gates and Steve Ballmer, and address Microsoft’s long-standing reputation as a hive of intense corporate infighting. (Programmer/cartoonist Manu Cornet crisply summed up the Microsoft culture in a 2011 org chart spoof that depicted the various operating groups pointing handguns at each other.) The reading assignment “was the first clear indication that Satya was going to focus on transforming not just the business strategy but the culture as well,” says Microsoft president and chief legal officer Brad Smith, a 24-year company veteran… …When I ask Nadella for his own account of working with his predecessors, he’s blunt. “Bill’s not the kind of guy who walks into your office and says, ‘Hey, great job,’ ” he tells me. “It’s like, ‘Let me start by telling you the 20 things that are wrong with you today.’ ” Ballmer’s technique, Nadella adds, is similar. He chuckles at the images he’s conjured and emphasizes that he finds such directness “refreshing.” (Upon becoming CEO, Nadella even asked Gates, who remains a technology adviser to the company, to increase the hours he devotes to giving feedback to product teams.) Nadella’s approach is gentler. He believes human beings are wired to have empathy, and that’s essential not only for creating harmony at work but also for making products that will resonate. “You have to be able to say, ‘Where is this person coming from?’” he says. “‘What makes them tick? Why are they excited or frustrated by something that is happening, whether it’s about computing or beyond computing?’” His philosophy stems from one of the principal events of his personal life. In 1996, his first child, Zain, was born with severe cerebral palsy, permanently altering what had been a pretty carefree lifestyle for him and his wife, Anu. For two or three years, Nadella felt sorry for himself. And then—nudged along by Anu, who had given up her career as an architect to care for Zain—his perspective changed. “If anything,” he remembers thinking, “I should be doing everything to put myself in [Zain’s] shoes, given the privilege I have to be able to help him.” Nadella says that this empathy—though he cautions that the word is sometimes overused—”is a massive part of who I am today. . . . I distinctly remember who I was as a person before and after,” he says. “I won’t say I was narrow or selfish or anything, but there was something that was missing.””

Microsoft’s excellent Glassdoor reviews also provide clues on the fantastic people culture that Nadella appears to have built. Nadella has a 99% approval rating on Glassdoor as CEO – far higher than the average Glassdoor CEO rating of 69% – and 95% of Microsoft’s employees who rated the company will recommend their friends to work at the software giant. The very first comment on Glassdoor we saw read, “Brilliant colleagues, incredible culture and a purpose-led mission that delivers impact.”

Second , on his first day as CEO of Microsoft, Nadelle sent an email to all of Microsoft’s employees. In it, he wrote that “our job is to ensure that Microsoft will thrive in a mobile and cloud-first world.” He’s doing great on this front. The table below shows the explosive growth in Microsoft’s Commercial Cloud revenue during Nadella’s tenure as CEO (Nadella became CEO in February 2014, which is in the second half of FY2014):

And earlier in this article, we also discussed the following positive aspects about Microsoft’s cloud-related business: (1) Azure’s stunning growth in the past few years; (2) Azure’s impressive market-share gains; and (3) the big jump in consumer subscribers to the cloud-based Office 365 productivity software. Nadella does not seem keen to rest on his laurels. Microsoft’s Project xCloud games streaming service which we mentioned earlier, works on Android mobile devices. And at Microsoft’s recent Build 2020 conference, Nadella said the following about Azure: 

“We’re innovating at every layer from edge to hybrid to data and AI. We’ve always led with hybrid computing. Azure Arc is the first control plane built for a multi-cloud, multi-edge world.”

Interestingly, Nadella’s decision to focus Microsoft on building for the cloud after he became CEO worried Microsoft’s directors: The cloud business had lower margins than Microsoft’s traditional software-sales business and the directors were not used to it. But Nadella’s decision proved to be right, and Microsoft is reaping the rewards. Nadella also has an audacious vision to make Azure the “world’s computer.” A key highlight of Azure’s progress happened in late 2019. The United States Department of Defence picked Azure over Amazon’s AWS to award a US$10 billion cloud computing contract. The contract, named JEDI (Joint Enterprise Defense Infrastructure), showed that Azure can compete with Amazon’s AWS and come out ahead.

Third, besides transforming Microsoft’s people culture, Nadella also drove a dramatic – and we think positive – change in the way Microsoft approached open-source software. Linux, an open-source coding system, was once described as “a cancer” by Steve Ballmer, Nadella’s predecessor as Microsoft CEO. But under Nadella, Microsoft is now a strong supporter of Linux and the company has been incorporating Linux into its own software. Here’s an excerpt from a July 2019 article from Wired that describes one instance of how it’s beneficial for Microsoft to be working with Linux:

“ Thanks to a feature called Windows Subsystem for Linux, you can already run Linux applications in Windows. WSL essentially translates commands meant for the Linux kernel—the core part of the operating system that talks to hardware—into commands for the Windows kernel. But now Microsoft will build the Linux kernel into WSL, starting with a new version of the software set for a preview release in June… … At first blush it may sound like a strange idea. But it makes perfect sense to programmers, especially web developers. Linux is the most common operating system for running web servers, but Windows is still king inside corporations. Making it easy to run Linux code in Windows is a boon for developers who need to use a Windows machine to write code that runs on Linux servers.”

Fourth, we’re impressed by the way Nadella has accelerated growth at Microsoft despite taking over the company when its business was already massive. For perspective, Microsoft’s revenue in FY2013 (remember, Nadella took over in the second half of FY2014) was US$77.8 billion. The table below shows the annualised growth rates in Microsoft’s revenue, net profit, and operating cash flow for various time periods to highlight the differences between the pre-Nadella and current eras. Note the significantly faster revenue growth rate for the FY2017-FY2020 time period – we think the growth rate achieved in FY2017-FY2020 show the fruits of the company’s transformation under Nadella’s leadership, and so they are a good indicator of Microsoft’s revenue growth over the next few years.

4. Revenue streams that are recurring in nature, either through contracts or customer-behaviour

Microsoft has multiple revenue streams, as we have shown earlier. The company does not breakdown exactly how much of its revenue is recurring in nature. But what we know for sure is that the Commercial Cloud business, which accounted for 36.2% of Microsoft’s total revenue in FY2020, is recurring. This is because the business relies on subscription and/or usage-based models. 

We also have a rough idea of how much of Microsoft’s Commercial Cloud business will return in the next fiscal year. Microsoft reports its remaining performance obligations (RPO), which consists of unearned revenue and amounts that will be invoiced and recognized in future periods. As of 30 June 2020, Microsoft’s RPO was US$111 billion, of which US$107 billion was related to its commercial business (this includes the Commercial Cloud business). Microsoft expects to recognise around 50% of the US$107 billion (roughly US$53 billion) as revenue over the next 12 months. This lends further weight to our view that the Commercial Cloud business is recurring in nature (for perspective, Commercial Cloud had revenue of US$51.7 billion in FY2020). 

We believe that there are significant recurring revenues in other areas of Microsoft’s business too. For instance, we think that Microsoft also enjoys fairly predictable revenue streams through the licensing of its Windows operating system (OS) software. First, the Windows OS dominates the OS market for personal computers with a 77% share as of August 2020. Second, we think there’s a sticky customer base as Windows OS users tend to continue with the Windows OS once they have learnt how to use it. These traits mean that software developers will be keen to write software and programs that are compatible with the Windows OS, increasing the OS’s value proposition. All of these then in turn cause computer manufacturers to prefer to pre-install the Windows OS in personal computers over other OS-es, leading to stable demand for the Windows OS. Indeed, revenue from the Windows business has displayed steady growth over the past few years as the table below illustrates.

In other examples of recurring revenues in Microsoft’s business:

• Microsoft has 42.7 million consumer subscribers to its Office 365 cloud-based productivity software
• The Gaming sub-segment has subscriptions and advertising services, both of which are recurring in nature
• The Search Advertising sub-segment is recurring because of customer behaviour, since companies have to continuously advertise to build awareness amongst their customers.    

5. A proven ability to grow

The table below shows Microsoft’s important financial numbers since FY2010. (We did not pick an earlier time period as the starting point because Microsoft’s business has gone through significant changes in the past few years, so more-recent data is better suited for us.)

A few key things to highlight from Microsoft’s financials:

• For the entire time period under study, Microsoft’s revenue has grown in nearly every single year. FY2016 was the only year there was a decline and even then, the fall was just 2.6%. From FY2010 to FY2020, Microsoft’s revenue compounded steadily at 8.6% per year. More recently, from FY2017 to FY2020, the company’s revenue increased at a significantly faster annual rate of 14.0%. As we mentioned earlier in this article, we think that the revenue growth achieved in FY2017-FY2020 shows the fruits of Microsoft’s transformation under Satya Nadella’s leadership.
• Net income has been consistently positive, although growth has not been smooth. From FY2017 to FY2020, net income has compounded impressively at 20.2%. There was a sharp drop in net income in FY2018, but this was due to a one-off US$13.7 billion charge recorded in the fiscal year because of changes to US tax laws that were enacted in December 2017. 
• Microsoft’s operating cash flow and free cash flow (net of capital expenditures and acquisitions) have both been consistently positive. There’s also a clear upward trend over the years for both metrics. The free cash flow in FY2017 was abnormally low because Microsoft acquired LinkedIn during the fiscal year (in December 2016 to be exact) for US$27 billion. From FY2010 to FY2020, operating cash flow compounded at 9.7% annually; the annualised growth rate had jumped to 15.4% for FY2017-FY2020. Meanwhile, free cash flow increased by 6.9% per year from FY2010 to FY2020. The growth rate in free cash flow from FY2017 to FY2020 was absurdly high at 98.8% per year, but that’s because of the low free cash flow in the base year. Shifting the base year to FY2016 will result in compound annual growth of 16.0% in free cash flow. We also want to highlight that Microsoft’s free cash flow has tracked its net income pretty closely.
• The balance sheet was rock-solid throughout the entire time frame we’re looking at with the amount of cash (including short-term investments) significantly outweighing the amount of debt. In fact, Microsoft’s net-cash position has increased from US$30.8 billion in FY2010 to US$73.2 billion in FY2020. We believe that Microsoft can afford to even be more aggressive with its share buybacks and acquisitions.
• Microsoft has not been diluting shareholders. Because of share buybacks, the number of shares declined by 1.5% per year from FY2010 to FY2020 and by 1.4% annually from FY2015 to FY2020. The buybacks have helped Microsoft’s existing shareholders to have a larger piece of the pie over time. For instance, the annual growth in Microsoft’s earnings per share for FY2017-FY2020 was 21.0%, compared to the net income growth rate of 20.2% per year.

The second half of FY2020 (1 January 2020 to 30 June 2020) was when COVID-19 started spreading across the world. Microsoft’s business performance in this period has been impressive, as shown in the table below. To a certain extent, the pandemic has benefited Microsoft, with Satya Nadella commenting in the FY2020 third-quarter earnings update that the company saw “two years’ worth of digital transformation in two months.”

6. A high likelihood of generating a strong and growing stream of free cash flow in the future

Ultimately, we want our portfolio companies to be able to generate a growing stream of free cash flow in the future because we believe this is what makes companies become more valuable over time.

We believe Microsoft scores well in this criterion for two reasons. First, Microsoft’s revenue is likely to continue growing at a healthy clip in the years ahead. In particular, revenue from Azure and Microsoft’s other subscription businesses will likely grow significantly as companies shift towards cloud-based software and solutions. Second, Microsoft has a fantastic track record in generating free cash flow. The company’s average free cash flow margin (free cash flow as a percentage of revenue) for FY2015-FY2020 was an excellent 23.3%. We see no reason why Microsoft’s free cash flow margin will shrink in the future. 

We like to keep things simple in the valuation process. In Microsoft’s case, we think the price-to-earnings (P/E) and price-to-free cash flow (P/FCF) ratios are appropriate metrics to value the company, since it has a long history of producing solid and growing streams of profit and free cash flow. 

We completed our purchases of Microsoft shares with Compounder Fund’s initial capital in late July 2020. Our average purchase price was US$205 per Microsoft share. At our average price and on the day we completed our purchases, Microsoft had trailing P/E and P/FCF ratios of 36 and 37, respectively. These ratios are on the wrong side of 30, and also high relative to their histories. The chart below shows Microsoft’s P/E and P/FCF ratios over the last five years.

But we believe that Microsoft deserves a higher multiple than what the market was paying for it back in late 2015. Microsoft has grown its Commercial Cloud business at rapid rates in the past few years, and this business currently makes up more than a third of the company’s overall revenue. Moreover, revenue from the Commercial Cloud business is nearly all recurring in nature. The growth of Commercial Cloud – not to mention the other subscription-based businesses – means that Microsoft is now a more robust and predictable business, and hence worth higher valuations. We also think that Microsoft will be able to compound its top-line in the low-teens rate, at the very least, in the next few years and this will be able to drive annual bottom-line and free cash flow growth in the high-teens range or more. For such growth, P/E and P/FCF ratios in the mid-30s do not seem high to us.

For perspective, Microsoft carried P/E and P/FCF ratios of 36 and 38 at the 29 September 2020 share price of US$210.

The risks involved

There are four key risks we are watching with Microsoft.

The first is key-man risk. Satya Nadella has been an immense transformative force at Microsoft. His foresight and ability to reinvent the company even when facing pressure from within has been instrumental to Microsoft’s recent successes. If there’s a change in leadership, it could impact Microsoft’s growth. The good thing is that Nadella is only 53 years old right now, so he likely still has plenty of years ahead of him to continue leading the company. 

The second is competition . Microsoft’s products and services have a host of competitors, big and small. In its annual report for FY2020, Microsoft name-dropped a who’s who of the technology sector as competitors. The list includes Alphabet (parent of search engine Google), Amazon, Apple, Cisco Systems, Facebook, IBM, Oracle, salesforce.com, SAP, Slack, Zoom, and more. Notably, Microsoft’s Azure lags behind Amazon’s AWS in the cloud computing space, although we believe that the cloud computing market is big enough for multiple winners. Nonetheless, we are still keeping an eye on Microsoft’s competitive landscape. 

The third is regulatory risk . Large technology companies in the USA have been under heavy scrutiny by the country’s regulators in recent years. For instance, in August this year, the CEOs of Alphabet, Amazon, Apple, and Facebook had to testify before US lawmakers on antitrust issues. Microsoft is currently not under the same level of scrutiny in the USA as its other large-tech peers, but the winds could change quickly, since the company had been fined by regulators in the more distant past. 

Summary and allocation commentary

We initiated a 4% position in Microsoft – a large-sized allocation – with Compounder Fund’s initial capital. Microsoft is a software juggernaut that we believe has years of reliable growth ahead of it. Its balance sheet is rock-solid, and it has an incredible leader in Satya Nadella. There are other strong positives going for Microsoft, including: A sensible compensation structure for its leaders; a high level of recurring revenue; a good track record of growth in revenue, profit, and free cash flow; and a high likelihood of being able to generate growing free cash flow in the future. 

There are risks to note for Microsoft, such as key-man risk, intense competition, and the potential danger of being subjected to heavier regulatory pressures. 

But after weighing the pros and cons, we’re comfortable to have Microsoft be one of the larger positions in Compounder Fund’s initial portfolio. We think highly of the company’s reliable growth prospects and we think the valuation is reasonable.

And here’s an important disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation; they are merely our thoughts that we want to share. Of all the companies mentioned in this article, Compounder Fund also currently owns shares in Amazon, Alphabet, Facebook, salesforce.com, and Zoom .

Ser Jing & Jeremy

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Microsoft Analysts To Focus On Tech Giant's Expansive AI Ambitions Following Q2 Earnings

Zinger key points.

• The $3 trillion tech giant Microsoft is set to report its second-quarter earnings on Jan. 30, after market hours.
• Analysts are expecting an uptick in Azure growth, continued advancements in AI and Copilot products and gross margin expansion.

Microsoft Corp MSFT , will be reporting its second-quarter earnings on Jan. 30. Wall Street expects $2.78 in EPS and $61.13 billion in revenues as the company reports after market hours .

Microsoft, founded by Bill Gates and Paul Allen in 1975, leads globally in computer software and diverse tech services. Renowned for Windows, Office, and Internet Explorer, it maintains a strong competitive advantage, backed by robust intellectual property like patents and exclusive code. The company has been under the leadership of Satya Nadella , as chairman and CEO of Microsoft since 2014.

Related: Microsoft CEO Satya Nadella Reportedly Gearing Up For India Visit With Focus On AI Opportunities

As Microsoft announces earnings, here's what analysts will be focusing on, and how the stock currently maps against Wall Street estimates.

Microsoft Investment Thesis 

With a valuation of over $3 trillion, Microsoft stands as a powerhouse in artificial intelligence (AI). This has been evident through its strategic $13 billion investment in OpenAI since 2019. Microsoft’s commitment to AI has also translated into the integration of ChatGPT technology across a range of products, including Bing, Windows, Edge, 365, and Azure , showcasing the company’s expansive AI ambitions.

The last fiscal quarter results underscored a significant uptick in business customers for the Azure OpenAI Service segment, reflecting a growing demand for AI solutions. As a key distributor of transformative AI technology, Microsoft positions itself for substantial financial gains.

Financially robust, the company generated an impressive $77.1 billion in net income over the last four quarters, allowing for shareholder returns through a $20.7 billion dividend payout, yielding $2.79 per share—an outperformance compared to technology peers like Apple AAPL , Oracle ORCL and Nvidia NVDA .

Microsoft’s 19 -year track record of dividend growth adds to its appeal, and a proactive share buyback program, with $17.3 billion in stock repurchased, supports organic share price appreciation.

Microsoft’s strategic focus on AI, coupled with strong financial performance and shareholder-friendly initiatives, positions it as a compelling, growth-oriented investment opportunity.

Microsoft Analysts' Focus & Consensus Ratings

Q2 Analysts' Focus:  Analysts are expecting an uptick in Azure growth due to increased migration from Oracle-using enterprises following the recent integration of Oracle databases. Continued advancements in AI and Copilot products are also expected to enhance Microsoft’s recurring revenues, improving the overall reliability of its top-line.

Additionally, this is likely to grant the company pricing power, leading to further gross margin expansion. CEO Satya Nadella’s consistent positive track record and the market’s underestimation of the rapid adoption of AI and Copilot by Microsoft customers may lead to another earnings surprise this quarter. Microsoft has a great history of beating consensus earnings estimates .

Ratings & Consensus Estimates: Consensus analyst ratings on Microsoft stock stand at a Buy currently with a price target of $406.59. Recent analyst ratings received in January 2024 have their price targets for Microsoft stock ranging from $420 to $600 a share.

MSFT Price Action: Microsoft stock was trading at $407.09 at the close of market day on Jan. 29.

Read Next: How Mark Zuckerberg’s Meta Soared Beyond $1 Trillion In Market Cap Propelling This Tech Giant To Unprecedented Heights!

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© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

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MSFT Factor-Based Stock Analysis - Warren Buffett

May 29, 2024 — 08:05 am EDT

Written by John Reese for Validea  ->

Below is Validea's guru fundamental report for MICROSOFT CORP ( MSFT ) . Of the 22 guru strategies we follow, MSFT rates highest using our Patient Investor model based on the published strategy of Warren Buffett . This strategy seeks out firms with long-term, predictable profitability and low debt that trade at reasonable valuations.

MICROSOFT CORP ( MSFT ) is a large-cap growth stock in the Software & Programming industry. The rating using this strategy is 86% based on the firm’s underlying fundamentals and the stock’s valuation. A score of 80% or above typically indicates that the strategy has some interest in the stock and a score above 90% typically indicates strong interest.

The following table summarizes whether the stock meets each of this strategy's tests. Not all criteria in the below table receive equal weighting or are independent, but the table provides a brief overview of the strong and weak points of the security in the context of the strategy's criteria.

Detailed Analysis of MICROSOFT CORP

MSFT Guru Analysis

MSFT Fundamental Analysis

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About Warren Buffett : Warren Buffett is considered by many to be the greatest investor of all time. As the chairman of Berkshire Hathaway, Buffett has consistently outperformed the S&P 500 for decades, and in the process has become one of the world's richest men. (Forbes puts his net worth at $37 billion.) Despite his fortune, Buffett is known for living a modest lifestyle, by billionaire standards. His primary residence remains the gray stucco Nebraska home he purchased for $31,500 nearly 50 years ago, according to Forbes, and his folksy Midwestern manner and penchant for simple pleasures -- a cherry Coke, a good burger, and a good book are all near the top of the list -- have been well-documented.

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About Validea : Validea is an investment research service that follows the published strategies of investment legends. Validea offers both stock analysis and model portfolios based on gurus who have outperformed the market over the long-term, including Warren Buffett, Benjamin Graham, Peter Lynch and Martin Zweig. For more information about Validea, click here

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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What Is an Investment Thesis?

• Understanding the Thesis

Special Considerations

• What's Included?

The Bottom Line

• Portfolio Management

Investment Thesis: An Argument in Support of Investing Decisions

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

The term investment thesis refers to a reasoned argument for a particular investment strategy, backed up by research and analysis. Investment theses are commonly prepared by (and for) individual investors and businesses. These formal written documents may be prepared by analysts or other financial professionals for presentation to their clients.

Key Takeaways

• An investment thesis is a written document that recommends a new investment, based on research and analysis of its potential for profit.
• Individual investors can use this technique to investigate and select investments that meet their goals.
• Financial professionals use the investment thesis to pitch their ideas.

Understanding the Investment Thesis

As noted above, an investment thesis is a written document that provides information about a potential investment. It is a research- and analysis-based proposal that is usually drafted by an investment or financial professional to provide insight into investments and to pitch investment ideas. In some cases, the investor will draft their own investment thesis, as is the case with venture capitalists and private equity firms.

This thesis can be used as a strategic decision-making tool. Investors and companies can use a thesis to decide whether or not to pursue a particular investment, such as a stock or acquiring another company. Or it can be used as a way to look back and analyze why a particular decision was made in the first place—and whether it was the right one. Putting things in writing can have a huge impact on the direction of a potential investment.

Let's say an investor purchases a stock based on the investment thesis that the stock is undervalued . The thesis states that the investor plans to hold the stock for three years, during which its price will rise to reflect its true worth. At that point, the stock will be sold at a profit. A year later, the stock market crashes, and the investor's pick crashes with it. The investor recalls the investment thesis, relies on the integrity of its conclusions, and continues to hold the stock.

That is a sound strategy unless some event that is totally unexpected and entirely absent from the investment thesis occurs. Examples of these might include the 2007-2008 financial crisis or the Brexit vote that forced the United Kingdom out of the European Union (EU) in 2016. These were highly unexpected events, and they might affect someone's investment thesis.

If you think your investment thesis holds up, stick with it through thick and thin.

An investment thesis is generally formally documented, but there are no universal standards for the contents. Some require fast action and are not elaborate compositions. When a thesis concerns a big trend, such as a global macro perspective, the investment thesis may be well documented and might even include a fair amount of promotional materials for presentation to potential investing partners.

Portfolio management is now a science-based discipline, not unlike engineering or medicine. As in those fields, breakthroughs in basic theory, technology, and market structures continuously translate into improvements in products and in professional practices. The investment thesis has been strengthened with qualitative and quantitative methods that are now widely accepted.

As with any thesis, an idea may surface but it is methodical research that takes it from an abstract concept to a recommendation for action. In the world of investments, the thesis serves as a game plan.

What's Included in an Investment Thesis?

Although there's no industry standard, there are usually some common components to this document. Remember, an investment thesis is generally a proposal that is based on research and analysis. As such, it is meant to be a guide about the viability of a particular investment.

Most investment theses include (but aren't limited to) the following information:

• The investment in question
• The investment goal(s)
• Viability of the investment, including any trends that support the investment
• Potential downsides and risks that may be associated with the investment
• Costs and potential returns as well as any losses that may result

Some theses also try to answer some key questions, including:

• Does the investment align with the intended goal(s)?
• What could go wrong?
• What do the financial statements say?
• What is the growth potential of this investment?

Putting everything in writing can help investors make more informed decisions. For instance, a company's management team can use a thesis to decide whether or not to pursue the acquisition of a rival. The thesis may highlight whether the target's vision aligns with the acquirer or it may identify opportunities for growth in the market.

Keep in mind that the complexity of an investment thesis depends on the type of investor involved and the nature of the investment. So the investment thesis for a corporation looking to acquire a rival may be more in-depth and complicated compared to that of an individual investor who wants to develop an investment portfolio.

Examples of an Investment Thesis

Portfolio managers and investment companies often post information about their investment theses on their websites. The following are just two examples.

Morgan Stanley

Morgan Stanley ( MS ) is one of the world's leading financial services firms. It offers investment management services, investment banking, securities, and wealth management services. According to the company, it has five steps that make up its investment process, including idea generation, quality assessment, valuation, risk management , and portfolio construction.

When it comes to developing its investment thesis, the company tries to answer three questions as part of its quality assessment step:

• "Is the company a disruptor or is it insulated from disruptive change? 
• Does the company demonstrate financial strength with high returns on invested capital, high margins, strong cash conversion, low capital intensity and low leverage? 
• Are there environmental or social externalities not borne by the company, or governance and accounting risks that may alter the investment thesis?"

Connetic Ventures

Connetic Adventures is a venture capital firm that invests in early-stage companies. The company uses data to develop its investment thesis, which is made up of three pillars. According to its blog, there were three pillars or principles that contributed to Connetic's venture capital investment strategy. These included diversification, value, and follow-on—each of which comes with a pro and con.

Why Is an Investment Thesis Important?

An investment thesis is a written proposal or research-based analysis of why investors or companies should pursue an investment. In some cases, it may also serve as a historical guide as to whether the investment was a good move or not. Whatever the reason, an investment thesis allows investors to make better, more informed decisions about whether to put their money into a specific investment. This written document provides insight into what the investment is, the goals of the investment, any associated costs, the potential for returns, as well as any possible risks and losses that may result.

Who Should Have an Investment Thesis?

An investment thesis is important for anyone who wants to invest their money. Individual investors can use a thesis to decide whether to purchase stock in a particular company and what strategy they should use, whether it's a buy-and-hold strategy or one where they only have the stock for a short period of time. A company can craft its own investment thesis to help weigh out whether an acquisition or growth strategy is worthwhile.

How Do You Create an Investment Thesis?

It's important to put your investment thesis in writing. Seeing your proposal in print can help you make a better decision. When you're writing your investment thesis, be sure to be clear and concise. Make sure you do your research and include any facts and figures that can help you make your decision. Be sure to include your goals, the potential for upside, and any risks that you may come across. Try to ask and answer some key questions, including whether the investment meets your investment goals and what could go wrong if you go ahead with the deal.

It's always important to have a plan, especially when it comes to investing. After all, you are putting your money at risk. Having an investment thesis can help you make more informed decisions about whether a potential investment is worth your while. Make sure you put your thesis in writing and answer some key questions about your goals, costs, and potential outcomes. Having a concrete proposal in place can spell the difference between earning returns and losing all your money. And that's if your thesis supports the investment in the first place.

Harvard Business School. " Writing a Credible Investment Thesis ."

Lanturn. " What is an Investment Thesis and 3 Tips to Make One ."

Morgan Stanley. " Global Opportunity ."

Medium. " The Data That Built Our Fund's Investment Thesis ."

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Yahoo Finance

Investors in microsoft (nasdaq:msft) have seen stellar returns of 266% over the past five years.

The worst result, after buying shares in a company (assuming no leverage), would be if you lose all the money you put in. But when you pick a company that is really flourishing, you can make more than 100%. For example, the Microsoft Corporation ( NASDAQ:MSFT ) share price has soared 249% in the last half decade. Most would be very happy with that.

Let's take a look at the underlying fundamentals over the longer term, and see if they've been consistent with shareholders returns.

View our latest analysis for Microsoft

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

During five years of share price growth, Microsoft achieved compound earnings per share (EPS) growth of 21% per year. This EPS growth is slower than the share price growth of 28% per year, over the same period. So it's fair to assume the market has a higher opinion of the business than it did five years ago. That's not necessarily surprising considering the five-year track record of earnings growth.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

We know that Microsoft has improved its bottom line lately, but is it going to grow revenue? If you're interested, you could check this free report showing consensus revenue forecasts .

What About Dividends?

As well as measuring the share price return, investors should also consider the total shareholder return (TSR). The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. As it happens, Microsoft's TSR for the last 5 years was 266%, which exceeds the share price return mentioned earlier. This is largely a result of its dividend payments!

A Different Perspective

It's good to see that Microsoft has rewarded shareholders with a total shareholder return of 31% in the last twelve months. Of course, that includes the dividend. That's better than the annualised return of 30% over half a decade, implying that the company is doing better recently. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. It's always interesting to track share price performance over the longer term. But to understand Microsoft better, we need to consider many other factors. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Microsoft you should know about.

For those who like to find winning investments this free list of undervalued companies with recent insider purchasing, could be just the ticket.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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Microsoft Stock Analysis: MSFT Is Your Ticket to $500 Per Share in 2024

Microsoft (NASDAQ: MSFT ) has been rallying since the start of the month, but the recent run-up for Microsoft stock could soon taper off. This could simply mean sideways price action a while. It may even mean a slide in price. Considering the company’s AI capabilities and growth potential, the risk of a price correction is low.

More importantly, don’t assume this means that it’s time to take profit, and make an exit for what has clearly emerged as a blue-chip among AI stocks . Instead, hold on, and be patient, as while it may take some time, another big liftoff will ultimately take shape.

Microsoft Stock: 3 Reasons for the Latest Upward Surge

Microsoft pulled back after reporting its latest quarterly results on April 25, but not too long after that, shares quickly got back on an upward trajectory. The reasons for this are threefold. First, the market’s positive response to other “Magnificent Seven” earnings releases provided a boost for MSFT.

Second, positive macro news, such as news of cooling inflation , provided a boost for Microsoft stock as well. Third, something more pertinent to the MSFT bull case. That would be news of further progress for capitalizing on the generative artificial intelligence growth trend has bolstered bullishness. A prime example is this week’s unveiling of Microsoft’s CoPilot+ AI-enabled PCs .

Besides direct examples of Microsoft’s AI progress, as we recently pointed out, things are looking even more promising at OpenAI . Microsoft has financially-backed OpenAI, and stands to benefit economically from the ChatGPT developer’s further commercialization efforts.

These latest efforts include plans to launch an OpenAI-powered search engine, as well as plans to integrate its AI technology into Apple’s (NASDAQ: AAPL ) upcoming iOS 18 operating system. Again though, while MSFT has kept climbing, hitting new all-time highs along the way, another cool-down in investor enthusiasm may be on the horizon.

Calm Before the Next Big Wave

While the aforementioned developments help to give substance to the latest Microsoft stock rally, the pace of big news could soon slow down once again. As it’s not until late July that the company again releases quarterly results, over the new months, MSFT could revert to sideways price performance.

Like we hinted above, shares could even dip a little. For the most part, due to possible concerns about valuation, Microsoft currently trades for 36.4 times forward earnings. This represents a material premium to other software-focused Mag 7 stocks. Yet while bullish sentiment may potentially decline by a small amount in the near-term, this will probably prove short-lived.

As soon as the next quarterly earnings release, confidence in Microsoft’s AI-powered growth runway stands to bounce back. Updates to guidance could strongly suggest that the company not only meets, but beats, forecasts for the coming fiscal year ending June 2025.

Sell-side estimates currently call for Microsoft’s revenue to grow by around 14.4% next fiscal year. Earnings per share consensus calls for earnings growth of 12.6%, from $11.83 to $13.32. However, the top end of estimates call for revenue and EPS growth north of 20%.

The Verdict: Hold On, and Feel Free to Buy More on Weakness

In the coming quarters, if Microsoft continues to crush it, especially in areas like cloud computing and AI software, there’s strong potential for MSFT to make a move to even higher price levels.

How high? Assuming that higher-than-expected growth would likely enable shares to maintain their current premium valuation, reaching $500 per share could arrive far sooner than you may think.

Over a multiyear time frame, there’s still strong potential for shares to deliver strong, steady gains, as above-average levels of growth persist thanks to the gen AI growth trend.

In the meantime, though, Microsoft stock could soon go from bull market mode, back to treading water. However, that’s nothing to fear. Instead, hold onto any existing positions, and feel free to add to/enter positions on any short-term weakness.

On the date of publication, Louis Navellier had a long position in MSFT. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.

The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.

Accelerating AI opportunity and climate solutions in Africa

May 30, 2024 | Melanie Nakagawa - Chief Sustainability Officer, Microsoft

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Last fall, I had the opportunity to participate in the inaugural Africa Climate Summit in Nairobi, Kenya, where world leaders discussed the role of sustainability investment, technology, and innovation in Africa. If there was one central theme that emerged from that week, it was that innovation abounds and there is a strong desire among the people of Africa to address the climate crisis, but they also need strong partners to help make African-led solutions a reality. I left Nairobi with optimism and a sense of possibility about the role a company like Microsoft can play in advancing this important work, including the role AI can play as an accelerant for these solutions.

Today, we are turning these possibilities into reality in several ways, whether that is expanding the AI for Good Lab to the continent or investing in innovative solutions through our Climate Innovation Fund.

Just this spring, together with G42, we announced a comprehensive package of digital investments in Kenya, including working with local partners to build a state-of-the-art datacenter campus in Olkaria, Kenya. The datacenter is designed to run entirely on renewable geothermal energy and use state-of-the-art water conservation technology. It serves as a strong example of the power of collaboration paired with a commitment to climate action.

Leveraging AI to accelerate sustainability solutions in Africa

Microsoft firmly believes that AI has tremendous potential to accelerate solutions to the various challenges societies are facing, including the climate crisis. My colleague Juan Lavista Ferres, CVP, Chief Data Scientist and head of our AI for Good Lab, has been leading the charge to unlock AI innovation opportunities with a strong focus on climate solutions across the continent in several ways:

Expansion of AI for Good Labs in Africa

In 2022, Juan and his team announced an expansion of our AI for Good Lab in Africa , building a new team of data scientists working to improve climate resilience. The work of these data labs has facilitated the inauguration of an Africa AI Innovation Council , which aims to bring together diverse stakeholders such as the Africa Development Bank Group, Africa Climate Foundation, Africa Risk Capacity, and Planet Labs, who are working on the fundamental problems of climate impact and sustainability.

Food and water security

The AI for Good Lab has also partnered with CETRAD, a Nairobi-based nonprofit, and the Nature Conservancy to improve water management in Northern Kenya. Leveraging our expertise in geospatial machine learning, we mapped irrigated and rainfed croplands to help local authorities manage water supplies from snowmelt on Mt. Kenya. This will ensure more efficient water usage for agriculture in that region by providing insights that help balance the extension of irrigated farmlands (increased yield) and the related consumption of water.

Conservation

In collaboration with Princeton University, the AI for Good Lab is working to understand long-term environmental changes in Namibia with the aim of unlocking new potential with historical aerial photos (>80 years old) to understand decades-long environmental changes. Such capabilities also open up a new ability to evaluate historical events and learn from them.

Investing in innovation through the Climate Innovation Fund

Another key theme from last fall’s summit was the importance of investment.

In 2020, Microsoft created the Climate Innovation Fund – a $1B investment initiative to accelerate technology development and deployment of new climate innovations through equity and debt capital. Over the past four years, we’ve allocated over $760M in capital to a global portfolio of more than 50 investments. These investments have focused on projects and companies that have the potential for clear climate impact, are largely underfunded by traditional capital sources, align with our core business, and ensure that developing economies and underserved communities benefit from climate solutions.

One of the early investments the fund made was in a company called KOKO Networks. KOKO provides a drop-in, clean-cooking solution for low- and medium-income households in Africa. Replacing charcoal as a cooking heat will mitigate carbon emissions, stop deforestation, and reduce indoor air pollution – building a more sustainable and healthier life for millions. Since the initial investment in 2022, we’ve made a follow-on investment in 2023, and look forward to KOKO’s continued effort to bring healthier and renewable clean cooking fuel to people in Africa.

Microsoft’s Climate Innovation Fund not only looks to invest directly in companies, but also provides project financing to bring existing climate solutions to scale. Earlier this year, we announced that Microsoft’s Climate Innovation Fund and Climate Fund Managers are investing in a project by Konexa to transport renewable energy from the Gurara Hydro Power Plant in Nigeria to two Nigerian Breweries facilities in Kaduna state. This is a great example of the role that investment can play in our work to help the world make the clean energy transition.

Collaborating on water action

At Microsoft, we have a responsibility to manage water impacts within our own operations – and we know we must also look beyond our four walls to help our customers and the world move toward a more sustainable future. That’s why we’ve set out to become a water positive company by 2030.

As part of our water access and replenishment work, we’re regularly evaluating project proposals in Africa. In March, we announced that we would be working with WaterAid on a water access project to rehabilitate four non-functional water systems and a sanitation facility, and strengthen hygiene practices and water access, sanitation, and hygiene (WASH) governance at selected communities in Lagos, Nigeria. Through this project, Microsoft aims to provide over 19,000 people with water supply services and over 1,400 people with sanitation services. We’re also working with the Nature Conservancy on a water replenishment project in Cape Town, South Africa, to increase the amount of water collected in the region’s water supply by removing water-guzzling invasive plant species on 150 hectares in priority sub-catchments of the Theewaterskloof Dam in the Western Cape Water Supply System. These two projects represent our continued focus on water in Africa and we’re excited to build on this foundation with more projects on the way.

More opportunity ahead

Microsoft’s commitment to innovation on the African continent runs deep and I continue to reflect on the many learnings and insights gained from my visit.  For example, Africa is home to 60% of the best solar resources globally , millions of talented professionals, a youthful population that is committed to addressing climate change and environmental degradation, and significant biodiversity and carbon sinks. This adds up to enormous potential for African-created solutions to address the climate crisis, and Microsoft stands as a strong partner with governments, customers, and partners to enable the skilling, investments and technology that will help accelerate it.

Tags: Africa , AI for Good , AI for Good Labs , Climate Innovation Fund , Environmental Sustainability , food security , sustainability , water positive

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Microsoft and G42 announce $1 billion comprehensive digital ecosystem initiative for Kenya

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Largest single private-sector digital investment in Kenya’s history will support economic development across East Africa

WASHINGTON — May 22, 2024 — Microsoft Corp. and G42 on Wednesday announced a comprehensive package of digital investments in Kenya, as part of an initiative with the Republic of Kenya’s Ministry of Information, Communications and the Digital Economy.

In collaboration with Microsoft and other stakeholders, G42 will lead the arrangement of an initial investment of $1 billion for the various components outlined in the comprehensive package. One of the Kenyan investment priorities is a state-of-the-art green data center that will be built by G42 and its partners to run Microsoft Azure in a new East Africa Cloud Region.

The initiative will include four additional pillars that will be pursued with local partners: (1) local-language AI model development and research; (2) an East Africa Innovation Lab coupled with broad AI digital skills training; (3) international and local connectivity investments; and (4) collaboration with the government of Kenya to support safe and secure cloud services across East Africa.

A letter of intent formalizing the relationship will be signed on Friday as part of Kenyan President William Ruto’s state visit to the United States of America, the first state visit to Washington, D.C., by a sitting African head of state in nearly two decades. The letter of intent will be signed between Microsoft, G42 and Kenya’s Ministry of Information, Communications and the Digital Economy, and was crafted with the assistance of the governments of the United States and the United Arab Emirates.

Sustainable data center infrastructure and new East Africa cloud region

As part of the agreement, G42, in collaboration with local partners, will design and build a state-of-the-art data center campus in Olkaria, Kenya, run entirely on renewable geothermal energy and designed with state-of-the-art water conservation technology. The data center will run on and provide access to Microsoft Azure through a new East Africa Cloud Region, which will become operational within 24 months of the signing of the definitive agreements.

This cloud region will provide customers access to scalable, secure, high-speed cloud and AI services to accelerate cloud adoption and the digital transformation of businesses, customers and partners across Kenya and East Africa.

His Excellency, President, Dr. William Samoei Ruto, stated that, “This partnership is bigger than technology itself. It is about coming together of three countries with a common vision of a nation empowered by technology, where every citizen has the opportunity to thrive in the global digital landscape. It’s about building a future where Kenya flourishes as a digital leader.”

The President emphasized, “In the spirit of mutual growth and shared prosperity, this LOI is a stepping stone toward a brighter, more connected and digitally empowered future for the USA, Kenya and the UAE. It embodies our collective aspiration to bridge the digital divide, accelerate technological innovation, and pave the way for a thriving digital economy that benefits the entire African continent and beyond.”

“This partnership between two companies and three countries highlights a real opportunity to bring digital technology to the Global South in a safe and secure manner,” said Brad Smith, vice chair and president of Microsoft. “This represents the single largest and broadest digital investment in Kenya’s history and reflects our confidence in the country, the government, its people and the future of East Africa.”

Peng Xiao, group chief executive officer of G42, said: “In partnership with Microsoft, we are excited to work with the Kenyan government to usher in a transformative era for the digital ecosystem in Kenya and the region. By establishing a green data center and developing AI tailored to the local culture, G42 is committed to fostering sustainable technological growth. This initiative will empower the Kenyan government and communities with robust, secure cloud services and AI capabilities, providing the foundation for a thriving digital economy across the region.”

Development of Swahili/English AI models and launch of AI societal services

To support national economic growth and development and support Kenya’s unique cultural and linguistic needs, G42 has begun work through its data infrastructure in the United States to train an open-source large language AI model in Swahili and English. To build on this and help accelerate advanced research in Kenya, Microsoft and G42 will increase their combined collaboration and support for local universities, through the Microsoft Africa Research Institute, the Microsoft AI for Good Lab, the Mohammed Bin Zayed University of Artificial Intelligence in Abu Dhabi, and select universities from Kenya and East Africa.

Microsoft’s AI for Good Lab in Nairobi will use AI technology to work with nonprofit organizations and other partners to help address economic and societal priorities across East Africa. This will include work to enhance food security by using advanced AI techniques to make site-specific fertilizer recommendations that increase agricultural productivity while minimizing environmental impacts. It will also include support for The Nature Conservancy (TNC), using AI high-resolution satellite data to monitor and reduce water risks for downstream wildlife and communities in northern Kenya.

In addition, collaborating with the Kenya Red Cross Society, Kenya Space Agency and National Disaster Management Unit, the AI for Good Lab will work to improve climate resilience by applying AI models to high-resolution satellite data for both disaster preparedness and disaster response. And in collaboration with the Smithsonian and Kenya Wildlife Trust, the Lab will use high-resolution satellite imagery and AI to monitor wildlife populations and track livestock expansion near protected areas in East Africa.

East Africa Innovation Lab and skilling support

Microsoft and G42 will launch and operate an East African Innovation Lab in Nairobi to help Kenyan and other East African startups, entrepreneurs, companies and organizations develop and implement cloud and AI services. The East Africa Innovation Lab will provide design sessions and rapid prototyping using Microsoft tools and technology, with skilling and mentorship support from Microsoft developers who work in the company’s Africa Development Center, which has 500 employees in Nairobi.

To help accelerate digital adoption, Microsoft and G42 will collaborate with a wide array of local partners to provide a range of digital and AI skills across Kenyan society and create a future-ready workforce. This will include offering digital and AI skilling programs to all government employees, a cybersecurity skilling program for more than 2,000 people per year, and a business skilling program for young entrepreneurs aged 18 to 24. The two companies will expand on ongoing relationships and work with the Kenya Private Sector Alliance, Stanbic Kenya Foundation, MPESA Foundation, UNDP Kenya, Young African Leaders Initiative, Jomo Kenyatta University of Agriculture and Technology, and the United States International University-Africa.

Internet connectivity

Kenya’s Ministry of Information, Communications and the Digital Economy will continue to expand work with Microsoft and G42 to broaden internet connectivity. G42 and its UAE ecosystem partners will leverage their resources to support Kenya’s development of international and domestic marine and terrestrial fiber cable infrastructure.

Microsoft will continue to expand its work to bring last-mile wireless internet access to 20 million people in Kenya and 50 million people across East Africa by the end of 2025. This will build on the company’s partnerships with Mawingu Networks, Liquid, CSquared and other local partners in Kenya. It will also include work with M-KOPA, one of the largest providers of solar home systems globally. As part of a fintech financing platform, M-KOPA has pioneered a pay-as-you-go model for smartphones ownership, with 2 million devices sold to date across the region.

Digital safety, privacy and security

Microsoft and G42 will work with the government of Kenya and will design and operate the new East Africa cloud region as part of a “trusted data zone” based on global standards to protect digital safety, privacy and security. With technical assistance and support from G42 and Microsoft, Kenya will establish the new data center as part of a “trusted data zone” under which data from other countries may be governed by their local laws, even while stored and resident in Kenya.

Kenya will utilize the new data center and cloud services for governmental and citizen services, and it will provide government support by adopting a “cloud-first” policy like those enacted in other countries to permit and encourage the government, its agencies, state-owned enterprises and other local entities to move their data and computing services to the cloud.

The parties will also work together to pursue the steps needed to ensure Kenya has sufficient contractual and technical assurances to support trusted digital and sovereign cloud services from the UAE, to facilitate rapid digital transformation even before the completed construction of the G42-Microsoft services in Kenya itself.

Microsoft will provide cybersecurity assistance and support to its customers in Kenya and across East Africa, including through the Microsoft Threat Intelligence Center (MSTIC) and the Microsoft Threat Analysis Center (MTAC).

Microsoft (Nasdaq “MSFT” @microsoft) creates platforms and tools powered by AI to deliver innovative solutions that meet the evolving needs of our customers. The technology company is committed to making AI available broadly and doing so responsibly, with a mission to empower every person and every organization on the planet to achieve more.

For more information, press only:

Microsoft Media Relations, WE Communications for Microsoft, (425) 638-7777,  [email protected]

Note to editors:  For more information, news and perspectives from Microsoft, please visit Microsoft Source at  http://news.microsoft.com/source . Web links, telephone numbers and titles were correct at time of publication but may have changed. For additional assistance, journalists and analysts may contact Microsoft’s Rapid Response Team or other appropriate contacts listed at  https://news.microsoft.com/microsoft-public-relations-contacts .

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Google promises $2 billion investment in Malaysia as Big Tech splurges on Southeast Asia spending

Big tech continues to spend big on Southeast Asia, with Malaysia landing a multibillion-dollar investment from Google just weeks after Microsoft pledged to spend $2.2 billion toward the country’s tech sector.

On Thursday, Google committed to investing $2 billion in Malaysia, including developing a data center and cloud facility. The investment, Google’s largest so far in Malaysia, is expected to support 26,500 jobs and add up to $3.2 billion to the economy, according to Bernama , the country’s state news agency.

Google’s investment follows a similar pledge from its competitor Microsoft made earlier this month. While on a trip to Kuala Lumpur, the country’s capital, Microsoft CEO Satya Nadella promised to spend $2.2 billion in the Southeast Asian country, including offering AI skills training to 200,000 Malaysians and establishing a national AI “Center of Excellence.”

Since 2022, the Malaysian government  has offered  tax incentives for technology-related investments, including data centers. The country also features cheaper land, power, and water compared to neighboring Singapore. Companies increasingly considered Malaysia as an option for data center investments after Singapore, the region’s data hub,  imposed a three-year pause  on new developments between 2019 and 2022, citing concerns over energy and land requirements for digital infrastructure.

Malaysia is also trying to move up the semiconductor value chain, with Prime Minister Anwar Ibrahim this week touting the country’s “ neutral and non-aligned ” position between the U.S. and China.

A wave of Southeast Asian tech investments

U.S. tech giants are ramping up their investments in Southeast Asia, hoping to tap into the region’s young workforce, rising incomes, and more neutral geopolitical position.

In addition to its $2.2 billion investment in Malaysia, Microsoft will also invest $1.7 billion in Indonesia over the next four years, targeting new cloud and AI infrastructure. The company also pledged to make “ significant commitments ” towards Thailand’s cloud and AI industries.

Amazon is pumping about $9 billion into Singapore over the next five years to grow the city-state’s cloud infrastrucutre sector.

Apple CEO Tim Cook also visited the region earlier this year. The company promised to increase its spending on Vietnam-based suppliers, and pledged $250 million to expand its Singpaore operations. Analysts suggested Cook’s visit was an effort to “hedge [Apple’s] supply-chain bets” and create a runway for possible future investments in the fast-growing region.

More broadly, tech firms and manufacturers are shifting their supply chains to the region amid a fractious U.S.-China relationship. Chipmakers like Intel, Infineon, GlobalFoundries, and Samsung have recently committed investment to Southeast Asian countries like Malaysia, Singapore, and Vietnam.

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