(Zacks Equity Research)
FAAMG stocks are a cluster of high-performing stocks that are always on investors’ radar. These stocks include Facebook FB, Apple AAPL, Amazon AMZN, Microsoft MSFT, and Alphabet GOOGL. The new moniker was coined by Goldman Sachs by replacing Netflix NFLX with Microsoft, as the former was a mismatch in terms of market capitalization.
Among the FAAMG stocks, Microsoft deserves a special mention as the software giant had a particularly good run in 2020. Shares of this Zacks Rank #2 (Buy) company have returned 41.3% year to date compared with the S&P 500 index’s rally of 16.9% on a year-to-date basis.
Microsoft witnessed robust traction for its Microsoft 365 offerings and a spectacular subscriber base growth for its cloud-based video conferencing app, Teams due to remote work trend triggered by COVID-19 crisis.
Moreover, the company’s pivot to cloud computing augurs well. Also, uptick in gaming activities across the globe due to shelter in place guidelines has given its video game business a massive impetus.
Let’s analyze the factors that are likely to drive Microsoft’s performance in 2021.
Pivot to Cloud Impressive
Microsoft gained significant ground in the lucrative cloud space, where its Azure Cloud service emerged as one of the dominant players. Per a Synergy Research Group report, Azure cloud’s global market share in the third quarter of 2020 stood at 18%, trailing only to Amazon Web services (“AWS”). AWS share was around 33% in the third quarter of 2020.
COVID-19 crisis has accelerated digital transformation for enterprises across the globe. Per an IDC report, the global spending on cloud services is expected to witness a CAGR of 15.7% between 2020 2024 and surpass $1 trillion.
Increasing migration of workloads to cloud will fuel demand for web-based application performance management and cloud infrastructure monitoring. This bodes well for Microsoft’s cloud service.
Microsoft is rapidly increasing Azure data center regions to strengthen its competitive positioning against AWS. The company boasts 66 Azure data center regions across the globe including Austria, Brazil, Greece, and Taiwan.
The winning of the massive $10-billion Joint Enterprise Defense Infrastructure (JEDI) contract from the U.S. Department of Defense (DoD) is expected to help Microsoft to reinforce its position in the cloud computing market. Also, the contract is likely to pave way for more contract wins from federal agencies and government.
In the first quarter of fiscal 2021, Intelligent Cloud segment (that includes server, and enterprise products and services) reported revenues of $13 billion, up 20% year over year and contributed 35% to total revenues. In the fiscal first quarter, Azure’s revenues climbed 48% year over year owing to healthy growth in consumption-based business.
Microsoft 365, Teams App Witnesses Robust Traction
Microsoft is a leader in the desktop PC market, with its operating systems being used in most PCs worldwide. The company is benefitting from stay at home and remote work trend induced by the ongoing pandemic. The software giant has a large Microsoft 365 installed user base.
In the fiscal first quarter of 2021, Windows 10 monthly active devices were up in double digits on a year-over-year basis across consumer, commercial, and education verticals. Office 365 commercial revenues soared 21%. Moreover, the work-from-home trend and new product launch timings boosted sales for its Surface laptops and Tablets, which recorded a rally of 37% in revenues in the last reported quarter.
Further, there has been a massive increase in demand for video conferencing tools owing to the remote work trend. Microsoft’s Teams app has been one of the beneficiaries of this trend, wherein it competes with Zoom and Cisco’s Webex.
Teams app boasts a daily active user base of more than 115 million and is being leveraged by 93 companies out of Fortune 100 companies.
Microsoft added new functionalities to the Teams app to help users begin a personal chat or initiate a group chat with up to 250 people. Users will be permitted to synchronize existing chats from phone to computer and carry-forward conversations on the device of their choice.
Further, Microsoft integrated Teams app with other offerings like PowerPoint presentations, Dynamics 365 SharePoint, and Stream. This makes the video conferencing app attractive to customers as it makes collaboration engaging and productive, while saving time and driving desired outcomes.
The work-from-home trend is here to stay as the companies find it more productive and cost efficient. As a result, demand for Microsoft 365, Surface products and Teams will continue to remain high.
The company also collaborated with C3.ai and Adobe to roll out new customer relationship management (CRM) offerings powered by Dynamics 365. It also unveiled a new data management solution, Azure Purview, to improve data governance for enterprises.
Video Gaming Market Promising
Microsoft is firing on all cylinders to capture a bigger share of the lucrative video game market.
Microsoft launched its latest gaming hardware Xbox Series X and Xbox Series S in November 2020. The console is witnessing heavy demand, outstripping supply. Markedly, the global launch for Xbox Series X is likely to have given Xbox a head start in the latest console wars as Sony’s PlayStation 5 had a staggering release.
Further, Microsoft announced acquisition of Bethesda Softworks’ parent company — ZeniMax Media — in an all-cash deal worth $7.5 billion to up its ante in the video game space. The buyout will increase the number of in-house creative studios to 23 from 15 at present for Microsoft.
Moreover, the company is working on its Xbox Game Pass Ultimate subscription service to boost its competitive stance. Subscription model ensures a recurring revenue stream. The company added various perks at no additional cost to the Ultimate subscription service to gain more subscribers.
The tech giant integrated its cloud gaming service as well as bundled EA Play Service and offers a month free subscription of Disney+ with its Game Pass Ultimate subscription. The Xbox Game Pass service been a blockbuster hit and amassed over 15 million users in 41 countries.
The momentum seen in Microsoft’s various businesses is likely to continue in 2021. As mass vaccinations programs will be a time-consuming affair, the remote work trend, telehealth and online learning trend is unlikely to dissipate in the near term. This bodes well for Microsoft’s top line and makes the stock an attractive bet for investors looking for healthy gains.
Further, with strong management team, solid fundamentals, a sound cash position and an impressive shareholder return policy, Microsoft could prove to be a solid bet for investors in 2021.