Investing in Microsoft Stock (MSFT)

Investing

Microsoft Corp., one of the world’s biggest tech companies, sells personal computing devices, cloud systems and services, software and other products. Microsoft is listed on the Nasdaq exchange under the ticker symbol, MSFT.

The company was founded in 1975 by Bill Gates and Paul Allen in a garage in Albuquerque, New Mexico. Five years later, Gates and Allen were hired to provide the operating system for IBM’s first personal computer, followed in 1985 by Microsoft’s launch of its now ubiquitous Windows software product. In 1986, the company raised $61 million in an initial public offering (IPO) that some analysts referred to as “the deal of the year.” By the late 1980s, Microsoft became the world’s largest personal-computer software company. The Redmond, Washington-based company’s stock rose more than a hundred-fold in the ten years after the IPO, and today it’s one of the world’s largest companies by market value. 

With products geared toward both consumers and businesses, Microsoft competes in a broad range of industries against companies including Apple, Inc. (AAPL), Amazon.com Inc. (AMZN), International Business Machines Corp. (IBM), and Oracle Corp. (ORCL).

Microsoft’s Latest Developments

  • Microsoft has recently teamed up with Walmart Inc. (WMT) to make a joint bid to acquire the U.S. operations of the popular video app TikTok from Chinese internet company ByteDance. The only other company to have made a bid is Microsoft competitor Oracle. The bids come after U.S. President Donald Trump issued an executive order mandating that TikTok sell its U.S. operations by mid-September or else the company must cease operations within the country. The Trump administration says that TikTok poses a national security threat to the U.S.

Key Takeaways

  • Microsoft sells computing devices, cloud systems and services, software and other products to consumers and businesses.
  • The company’s Intelligent Cloud segment is now the largest source of revenue as well as the fastest growing.
  • Cloud services strength drove Q4 FY 2020 results.
  • Microsoft recently teamed up with Walmart to make a joint bid for U.S. operations of video app TikTok.

Microsoft’s Financials

In fiscal year (FY) 2020 ending June 30, 2020, Microsoft posted year-over-year (YOY) gains in revenue, net income, total assets, and other metrics. Net income grew 12.8% YOY to $44.3 billion while revenue rose 13.6% to $143.0 billion. Operating income for FY 2020 rose 23.3% to $53.0 billion and total assets were up 5.1%.

The growth in net income was a significant slowdown from the 136.8% YOY growth posted in FY 2019. However, 2019 growth was inflated by abnormally low net income in FY 2018 due to charges related to the enactment of the Tax Cuts and Jobs Act, as well as a net income benefit in 2019 for the same reason.

Microsoft’s Business Segments

Microsoft divides its business into three reportable segments, breaking out results by both revenue and operating income: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. These segments are categorized according to both product type and customer demographic. Productivity and Business Processes, for instance, includes products across multiple platforms and devices relating to productivity and communication. And More Personal Computing focuses on products designed with end users, developers, and IT professionals in mind.

Productivity and Business Processes

Microsoft’s Productivity and Business Processes segment includes a portfolio of products designed to enhance corporate productivity, communication, and information services. One of its major products is Microsoft’s Office software suite, including both Commercial and Consumer divisions. The segment also includes business solutions products such as Dynamics as well as the professional networking site, LinkedIn.

In FY 2020, Productivity and Business Processes generated $46.4 billion in revenue, comprising more than 32% of Microsoft’s total revenue. This amounted to an increase of 12.7% YOY, slower than the YOY growth of 14.8% in FY 2019. Operating income for the segment grew 15.4% to $18.7 billion in FY 2020, accounting for just over 35% of the total, making it Microsoft’s most profitable segment.

Intelligent Cloud

The Intelligent Cloud segment comprises all of Microsoft’s public, private, and hybrid server products as well as cloud services for business. These include Microsoft Azure, SQL Server, Windows Server, GitHub, Enterprise Services, and more.

For FY 2020, Intelligent Cloud generated $48.4 billion in revenue, accounting for almost 34% of total revenue. The segment’s revenue is just slightly above that posted by the More Personal Computing segment, making it Microsoft’s largest source of revenue. Up 24.1% YOY, Intelligent Cloud was also the fastest growing revenue segment for the year. It was also the fastest growing segment in terms of operating income, which was up 31.6% to $18.3 billion. Intelligent Cloud operating income accounts for just under 35% of Microsoft’s total operating income.

More Personal Computing

Microsoft describes its More Personal Computing segment as consisting of products and services aiming toward “harmonizing the interests of end users, developers, and IT professionals,” no matter the device. The Windows operating system, Surface device, and gaming products are all included in this segment.

In FY 2020, More Personal Computing generated $48.3 billion in revenue, comprising about 34% of total revenue. While revenue grew just 5.6% YOY for the segment, operating income rose 24.1% to $15.9 billion. More Personal Computing accounts for about 30% of the company’s total operating income.

Top 3 Individual Insider Shareholders of Microsoft

Satya Nadella

Satya Nadella owns 1,337,768 shares of Microsoft stock, representing 0.02% of total shares outstanding. Nadella has served as Chief Executive Officer (CEO) of Microsoft since 2014. Nadella joined Microsoft 28 years ago in 1992. He has held leadership roles in Microsoft’s enterprise and consumer businesses. Most recently, Nadella was executive vice president of Microsoft’s Cloud and Enterprise group, where he led the transformation to the cloud infrastructure and services business, which has outperformed the market and took share from competition. Microsoft today is one of the world’s biggest cloud services providers. Before joining Microsoft, Nadella was a member of the technology staff at Sun Microsystems.

Bradford L. Smith

Brad Smith owns 845,058 shares of Microsoft stock, representing 0.01% of total shares outstanding. Smith is President and Chief Legal Officer of the company, having previously served as Microsoft’s general counsel. Smith serves as the company’s chief legal officer and leads the company’s initiatives on public issues such as cybersecurity, privacy, and environmental sustainability. After joining Microsoft in 2003 as general counsel, Smith spent the following decade leading work to resolve the company’s antitrust controversies with governments around the world. Previously, he was an associate and then partner at Covington and Burling in Washington, D.C.

Jean-Philippe Courtois

Jean-Philippe Courtois owns 600,510 shares of Microsoft, representing 0.01% of total shares outstanding. Courtois is Executive Vice President and President, Microsoft Global Sales, Marketing and Operations. He joined Microsoft in 1984 and has held numerous positions since that time, including general manager for Microsoft France, CEO and President of Microsoft EMEA, and President of Microsoft International.

Top 3 Institutional Shareholders of Microsoft

Institutional investors hold the majority of Microsoft’s shares at about 70.7% of total shares outstanding.

Vanguard Group Inc.

Vanguard Group owns 640.2 million shares of Microsoft, representing 8.4% of total shares outstanding, according to the company’s 13F filing for the period ending March 31, 2020. Vanguard is primarily a mutual fund and ETF management company with about $6.2 trillion in global assets under management (AUM). The Vanguard S&P 500 ETF (VOO) is among the company’s largest exchange-traded funds (ETFs) with about $151 billion in AUM. Microsoft is the largest holding in this ETF, representing 5.5% of VOO’s portfolio.

BlackRock Inc.

BlackRock owns 517.6 million shares of Microsoft, representing 6.8% of total shares outstanding, according to the company’s 13F filing as of March 31, 2020. BlackRock is primarily a mutual fund and ETF management company with approximately $6.47 trillion in AUM. The iShares Core S&P 500 ETF (IVV) is among BlackRock’s largest ETFs with approximately $198.7 billion in AUM. Microsoft is the largest holding in this ETF, representing 6.2% of IVV’s portfolio.

State Street Corp.

State Street owns 314.8 million shares of Microsoft, representing 4.2% of total shares outstanding, according to the company’s 13F filing as of March 31, 2020. State Street manages mutual funds, ETFs and other investments with $3.1 trillion in AUM. The SPDR S&P 500 ETF Trust (SPY) is among State Street’s largest ETFs with approximately $276 billion in AUM. Microsoft is the largest holding in this ETF, representing 6.2% of SPY’s portfolio.

Companies Owned by Microsoft

While Microsoft began as a software company, it has expanded its reach into broad areas of the tech industry. Along with software, the company now sells personal computing devices, cloud-computing infrastructure and services, artificial intelligence, and more. Much of Microsoft’s expansion has come through a string of small and large acquisitions totaling tens of billions of dollars in value.

Not all of those acquisitions have worked out, however. As part of its attempt to develop a Windows Phone to compete with Apple’s iPhones and Google’s Android smartphone operating system, Microsoft acquired Nokia for $7.2 billion in 2014. But the deal was a major failure. In the summer of 2015, Microsoft had to write off $7.6 billion related to the acquisition and sold the brand in 2016 for $350 million to HMD Global, a subsidiary of Taiwanese firm Foxconn Technology Co. Ltd.  The Windows Phone has been discontinued.

Microsoft’s expansion, both internally and via acquisition, has also brought it under the scrutiny of regulators. In 2000, the company was ordered to break up into two parts after losing a U.S. antitrust lawsuit. While the ruling was overturned, Microsoft was ordered in 2002 to comply with key rules to ensure a more level tech playing field. The criticism of Microsoft and other mega tech companies over their size and market dominance continues to this day. Amid critics’ calls for the breakup of big tech companies such as Amazon.com Inc. (AMZN), in early 2020 the Federal Trade Commission (FTC) ordered Microsoft, Apple, Amazon, Alphabet Inc. (GOOGL), and Facebook Inc. (FB), to provide information on every acquisition they’ve done between Jan. 1, 2010 and Dec. 31, 2019.

Below, we look in detail at five of Microsoft’s key acquisitions, which largely illustrate the company’s strategy of moving into new areas such as social networking, video games, telecommunications, and online advertising. The list also includes a software deal, adding to their legacy business. Four of these deals took place since 2010, the focus of the FTC inquiry, while one took place in 2007. In most cases, Microsoft does not break out the revenue or profit for these companies.

LinkedIn Corp.

  • Type of Business: Professional Social Network Site
  • Acquisition Price: $27.0 billion
  • Acquisition Date: December 8, 2016 (completed)
  • Annual Revenue (FY 2019): $6.8 billion

LinkedIn, the business-focused social media website focused on helping people cultivate their professional networks, was founded in 2002. It became profitable within five years. Between 2007 and 2011, the year it went public, the company grew from 15 million members to more than 100 million. In 2016, LinkedIn was acquired by Microsoft, and the following year reported more than 500 million members in about 200 countries. Microsoft has taken a fairly hands-off approach with the acquisition, allowing LinkedIn to retain its core brand and culture, and even its CEO Jeff Weiner. LinkedIn mainly provides Microsoft with a valuable social media platform that earns revenue through premium memberships. But it also generates commercial cloud revenue to Microsoft through LinkedIn’s commercial business.

Skype Technologies S.A.R.L.

  • Type of Business: Telecommunications Application
  • Acquisition Price: $8.5 billion
  • Acquisition Date: May 10, 2011 (announced)

Skype Technologies, which is currently headquartered in Luxembourg, was founded in 2003 by Niklas Zennström of Sweden and Janus Friis of Denmark. Skype became an early success story in the area of voice-over-Internet protocol (VoIP), a communications technology that allows users to interact by audio through an Internet connection, rather than through an analog one. Between 2005 and 2010, the company’s registered users soared from 50 million to more than 600 million. Since Microsoft acquired Skype in 2011, the parent has integrated its capabilities with technologies like Xbox and Windows devices, and with online platforms like Outlook and Xbox Live.

GitHub

  • Type of Business: Software Development Platform
  • Acquisition Price: $7.5 billion
  • Acquisition Date: October 25, 2018 (completed)

GitHub was founded in 2007 when Chris Wanstrath created the first “commit”, a term used to describe the action of storing a file’s hierarchy and content in a digital repository. GitHub has since become a popular open-source coding-repository and development tool for software developers and large companies. By the time Microsoft acquired it in 2018, GitHub had reached 30 million developers and was hosting more than 100 million repositories. The acquisition demonstrates Microsoft’s focus on open-source development as well as aims to accelerate developer use of the platform and provisioning of more tools and services to new audiences.

Mojang

  • Type of Business: Video Game Studio
  • Acquisition Price: $2.5 billion
  • Acquisition Date: September 15, 2014 (announced)

Mojang, the Sweden-based video game studio best known for producing the popular game Minecraft, was founded in 2009 by Markus “Notch” Persson. As of May 2019, Minecraft had sold more than 176 million copies, making it one of the best-selling games of all time. The company was bought by Microsoft in 2014. Today, Mojang’s games are played on the Windows and Xbox platforms, iOS, Playstation, and more. Microsoft has put the game studio to multiple uses, including designing an educational version of Minecraft for classrooms.

aQuantive

  • Type of Business: Online Advertising Platform
  • Acquisition Price: $6.3 billion
  • Acquisition Date: August 13, 2007 (completed)

Founded in 1997, aQuantive encompassed a family of brands focused on providing digital marketing services, including advertising tool sets, consultation services, media planning and buying, and more. Microsoft acquired the company in 2007 in an attempt to compete with Google in the market for online advertising. But like the Nokia deal mentioned above, the acquisition was a financial failure. In 2012, Microsoft wrote down the value of the ad business by $6.2 billion, indicating that it had drastically overpaid for aQuantive. Microsoft still operates an ad business, but it is focused on search advertising as opposed to aQuantive’s specialty in display advertising. And its 6.5% share of U.S. search-ad revenue is certainly no match for Google’s 73.1% share.

If You’d Invested in Microsoft at its IPO

Microsoft went public on March 13, 1986 at a price of $21.00 per share, or slightly more than $0.07 when adjusted for stock splits. Microsoft’s stock closed at $200.39 on Sept. 18, 2020. If you’d bought $10,000 in Microsoft stock at the end of its first day of trading on March 13, 1986, it would be worth $32.3 million dollars as of Sept. 18. If you’d invested $10,000 in the broader U.S. stock market through the Vanguard 500 Index fund (VFINX) over the same time period, it would now be worth $294,290. That’s a 322,600% return for Microsoft versus a 2,840% total return for VFINX. It’s also a 26.4% compound annual growth rate (CAGR) for Microsoft versus 10.3% for the broader market as represented by VFINX.


Source: YCharts.

Microsoft stayed private for more than a decade after it was founded in 1975. Because it made significant profits, especially after being hired by IBM to develop an operating system for its first PC in 1980, it didn’t require substantial additional capital. This allowed it to stay private, which CEO Bill Gates preferred, as he could maintain much more control over the company if it was privately held. Like many tech companies, however, Microsoft offered stock options to employees to attract talented workers. At the time, Jon Shirley, Microsoft’s COO, told Gates that at the rate they were offering stock to employees, the company would be required to register with the SEC by 1987.

Microsoft’s Stock Split History

MSFT Stock Splits
Date Split Ratio
9/21/1987 2 for 1
4/16/1990 2 for 1
6/27/1991 3 for 2
6/15/1992 3 for 2
5/23/1994 2 for 1
12/09/1996 2 for 1
2/23/1998 2 for 1
3/29/1999 2 for 1
2/18/2003 2 for 1

ETFs With Major Holdings of Microsoft Stock

ETFs Holding MSFT
Ticker ETF Name MSFT Weighting
XLK Technology Select Sector SPDR Fund 20.14%
IYW iShares U.S. Technology ETF 17.81%
VGT Vanguard Information Technology ETF 16.47%
FTEC Fidelity MSCI Information Technology Index ETF 16.42%
IXN iShares Global Tech ETF Technology Equities 16.06%
IETC iShares Evolved U.S. Technology ETF 14.53%
IWY iShares Russell Top 200 Growth ETF 11.31%
STLG iShares Factors US Growth Style ETF 11.26%
MGK Vanguard Mega Cap Growth ETF 11.15%
QQQ Invesco QQQ 10.72%

How Microsoft Reports Diversity & Inclusiveness

As part of our effort to improve the awareness of the importance of diversity in companies, we offer investors a glimpse into the transparency of Microsoft and its commitment to diversity, inclusiveness, and social responsibility. We examined the data Microsoft releases to show you how it reports the diversity of its board and workforce to help readers make educated purchasing and investing decisions.

Below is a table of potential diversity measurements. It shows whether Microsoft discloses its data about the diversity of its board of directors, C-Suite, general management, and employees overall, as is marked with a ✔. It also shows whether Microsoft breaks down those reports to reveal the diversity of itself by race, gender, ability, veteran status, and LGBTQ+ identity.

Microsoft Diversity & Inclusiveness Reporting
  Race Gender Ability Veteran Status Sexual Orientation
Board of Directors        
C-Suite
 
       
General Management ✔ (U.S. Only)      
Employees ✔ (U.S. Only)      

Frequently Asked Questions

How Profitable Is Microsoft?

Microsoft Corp. is indeed profitable. In its most recent earnings release, the company posted year-over-year gains in revenue, net income, total assets, and other metrics for its fiscal year 2020 ending June 30, 2020. Net income grew 12.8% year over year to $44.3 billion while revenue rose 13.6% to $143.0 billion. Operating income for fiscal year 2020 rose 23.3% to $53.0 billion.

Who Owns the Most Microsoft Stock?

The biggest individual insider shareholder of Microsoft is Satya Nadella, who owns 1,337,768 shares of Microsoft stock at last count, representing 0.02% of total shares outstanding. Nadella has served as Chief Executive Officer (CEO) of Microsoft since 2014, and first joined Microsoft in 1992.

The biggest institutional shareholder of Apple is Vanguard Group, which owns 640.2 million shares of Microsoft, representing 8.4% of total shares outstanding, according to the company’s most recent 13F filing for the period ending March 31, 2020.

Who Invented Microsoft Windows?

Bill Gates, co-founder and former chairman and CEO of Microsoft Corp., created Windows with his team at Microsoft in the 1980s. The original Windows 1 was released in November of 1985. It was the company’s first major attempt at a graphical user interface in 16-bit. The operating system ran on top of MS-DOS, which relied on command-line input.

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