Microsoft – More Than Just Word & Excel [SGO 19]

For all of you who think that Microsoft is still doing Office suite only, you need to catch up fast. It also owns one of the largest cloud computing ecosystem Azure and it moved into cloud in a way most giant enterprises will only hope for. With other entities like GitHub, Xbox and LinkedIn under the company, discover how Microsoft continues to stay dominant and relevant within the enterprise client space in this episode.

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podcast Transcript

Reggie: Hey Coconuts! Today in TFC Stock Geekout, we’re going to explore probably the most successful software company of all time. I mean, it’s Microsoft. You really don’t need me to hype for them but did you know that within that ecosystem, they own GitHub, Xbox and even LinkedIn. If you start to see the way they acquire, there is a trend. (It) ties back down to their business model and the clients they serve. We will talk about how the company continue to stay dominant within the enterprise client space and how it plans to stay relevant going forward.

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So joining me today to geek out on this company Microsoft is our in-house stock and tech geek Thomas Thio. Microsoft needs no further introduction but for all of you that think they’re still doing Microsoft Office suite only, you need to catch up fast. 

They own one of the largest cloud computing ecosystem Azure and they moved into cloud in a way most giant enterprises will only hope for. All these initiatives were born under the helm of Satya Nadella… I hope I never butchered his name. He is the legendary turnaround CEO of Microsoft. 

For your reference sake, this episode was recorded on the 28th of July, 2021. Our discussion today is solely for entertainment and education purposes only. It does not serve as any form of advice or recommendations. Thank you for loving what we do and empowering us financially to do more for you. Join our Telegram group to keep the discussion going. Let’s geek out.

So yes, today we are going to talk about this giant. I’m sure everybody knows. We don’t really need to introduce people to this company called Microsoft but the reality is it’s a lot bigger than what many of us know it to be. It’s so big that when we were coming online, I was like “hey Thomas, what is there to talk about this company? It’s just too many things.” 

It’s like broadly-diversified in itself. Is there actually some sort of competitive analysis that we can give it to this company and give people some insights? Why did we decide to talk about Microsoft and what is your take on this company at this moment?

Thomas: Sure. I think it helps understanding companies that actually have quite a big impact in our lives whether we see every day at work or maybe somehow it’s influencing the way that we work also. Microsoft is as you might know, it’s doing Windows, it’s doing your Office 365 and there’s other little things along its whole portfolio which also has quite a big influence, things that your Windows Server, GitHub, LinkedIn, Azure and those are all your software side of things.

Reggie: Are you sure those things are little? I think they’re all quite big…

Thomas: In Microsoft’s portfolio, it’s a smaller portion but in our everyday life… yeah I just speak generally because not everyone’s a engineer, for example, so they wouldn’t actually touch GitHub or SQL (Structured Query Language) Server, things like that. But maybe LinkedIn, we are more familiar with… Azure, the cloud, it powers a lot of different companies also because they don’t want to have their own cloud compute, but that’s the software side of thing.

Maybe the hardware… people may know: Windows. It’s everywhere, right? Your Windows laptops, Windows PCs. A few of you, we have a lot of Macs, MacBooks that you use at work or at your personal capacity when you’re studying and things like that but you might have a Windows PC lying around your house somehow. It’s Windows, it’s not a iMac for some reason. 

That aside, that’s also the Surface which is like a competitor to iPad. There’s of course a Windows phone, but no one knows… I’m not sure who uses that nowadays. There’s also the gaming unit, your Xbox 360 so for the really hardcore gamers other than your Sony, your Nintendo, you got your Xbox as well.

They also do a lot of these… they basically bought some of the games that are very, very famous to do with Xbox. I think back then, it was Halo. It might be a few other other titles now already, and it’s like “oh, you must play Halo on an Xbox 360, nothing else”, that kind of thing. It’s quite cool that that… 

Reggie: That they are broadly-diversified? Is it? 

Thomas: Yeah, they are pretty broadly diversified but primarily on the software/hardware kind of tech but very, very big in those kinds of areas.

Reggie: Yeah, so how should we understand Microsoft as a business? Because they… like you’ve pointed out, they have all these things and all of them have a very different business model whether is it from LinkedIn or whether is it Microsoft 365 or Azure, their cloud unit, what have you… all the way to Xbox gaming, they all have a different business model and dude, it’s like if we want to talk about all the business model, it’s going to be quite wild and it’s probably going to do like half a day of discussion just on this.

How would a retail investor that is trying to understand Microsoft at a preliminary level… should look at Microsoft as a business? What is the breakdown that you would push us towards? 

Thomas: I think we use the same three segments which Microsoft uses to report their revenue: their productivity and business process… basically things that help to improve your productivity or the way that you run your business. These are your Office 365. Imagine a world where there was no Google… sorry, there was no Microsoft Excel or Docs or slides or Presentation. Yeah, I’m using a lot of the Google’s ecosystem nowadays, but imagine the world didn’t have these from Microsoft, right? 

Sorry, I hate it when people force me to use the Microsoft ecosystem. A lot of corporate people are saying “can we talk on Microsoft Teams?” They sent me Excel. I was like oh my god, I don’t have that. Why don’t just give me a Google link? We can talk about that slightly later. Continue, please. 

Yes, sure. So these things are essential in any company, right? No matter what, you need to deal with data in a tabular form. You need columns, you need rows so it’s either your Google Sheets or your Microsoft Excel. That being said, Google has come a long way in building up their part of their product which is giving a hard fight to Office 365 as well but there’s a lot of businesses, there’s a lot of government agencies who’s still using Microsoft and using it quite heavily…

Reggie: Is there a reason why? 

Thomas: I think one is legacy. There’s a lot of documents that’s really inside these especially your Excel sheets and it’s not very easily migrated over into something else so they ended up having to just continue paying it. It’s not that bad, it’s not that expensive but it’s essential so that’s why it sticks. 

Other than the data itself, some of these companies actually embed a bit of their business process inside their macros so you can actually code out some things to run automatically inside your Excel or your… what do you call this? I forgot the name already… Microsoft Word. Jialat (uhoh), I don’t even use it nowadays but I know that… 

Reggie: So legacy… 

Thomas: Yeah, it is important. It’s important. This is your productivity and your business process side of things. Also, what you bao (include) inside is LinkedIn. For some reason, that comes under productivity and business process.

The second segment will be Intelligent Cloud. What they mean by Intelligent Cloud is all your really tech-related stuff on the software which floats somewhere somehow but you kind of use it also. So what are these? Your Azure cloud compute, your SQL server… basically, it’s like a database. You’ve got your GitHub. It’s a code repository where the engineers go in and post up their open source code or some of their projects. Some companies also will use it to host their code because they don’t want to host it anywhere else. It’s also secure. It’s very good for software engineering specifically. 

There’s also Visual Studio Code, which is a software which engineers use to do their code. You need a special kind of software to customize certain kinds of workflows when you code. That’s what Visual Studio Code does. There’s also Bing the search engine. There’s still parts of the world which uses it. It’s still being used. It’s not as prominent as Google, but they actually have some search revenue that’s coming in, and also Microsoft Teams. 

Microsoft Teams is basically a collaboration or chat software. Think of it as like WhatsApp or Telegram, you use it inside uni or use it outside for personal chats and all that. When you go inside a company, you would likely use Teams or maybe there’s Slack or maybe there’s Mattermost and stuff like that. Basically, these kinds of collaboration platforms which will help you to send back and forth messages, help you to store documents, help you to search for stuff, that’s Teams. 

The last segment, which is more of the hardware side of things, it’s personal computing. Personal computing consists of the Windows operating system. That one is a license. Every year, you have to go and pay. There’s also the hardware, which is Microsoft Surface, which is basically like your tablet and your gaming consoles like Xbox. 

Well, honestly I think it’s super broadly classified together. I don’t even know why LinkedIn is put in productivity. I never knew people still use Bing and like you said, Bing is a search engine so there’s a very different business looking at it. Do you think this is actually the best way to look at Microsoft as a company or should we look at it from… it’s like how people look at Amazon, right? There’s this main business that’s making all the money so this is where most of the revenue is and then there are some of these other growth spaces and then there’s the support that may or may not be monetized. Do you think we should look at the business, look at Microsoft this way or should we look at it more like how people look at Amazon?

I think this way is actually fine once it makes sense in the back of your head. How does it actually make sense? It’s basically the stuff that doesn’t really fit. You mentioned LinkedIn and Bing. LinkedIn, you can think of it as a productivity tool because say, if you are a normal user, you’re looking for a job. If you are the HR person, you use LinkedIn to actually send out all these messages to go and find people to fill these positions. At the same time for marketers, they also use LinkedIn to advertise, to put up some branding kind of campaigns on LinkedIn to a little bit leaning towards the HR side of things.

But as a whole, it’s like a platform which allows people to be more productive in that particular business process so that’s why it kind of makes sense in that direction but it doesn’t just exist on its own platform. LinkedIn was acquired by Microsoft. It has its own business model last time but where it fits into this is that yes, as part of Microsoft’s own marketing in their statements… sorry, in their case and all that, they want to put this down as… it’s a productivity and a business process too so in that sense, it fits there. 

For Bing, it’s a search engine that’s powered by all sorts of search technologies which use a lot of compute and that’s why it belongs under Intelligent Cloud. They could also be wanting people to perceive Bing something that powers their search. Fun fact: Bing the search engine, you just normally use as a consumer and all that. You want to… let’s say you use it. You want to find for whatever’s on the web and all that but behind the scenes, there’s a search engine and with that search engine, you can actually use it to power other kinds of search for other people. 

Companies can actually use that or license it as part of their enterprise services section but of course, they branch it out. Bing is just Bing, advertising revenue but uses at the Intelligent Cloud to get something done. With this kind of angle, productivity and business process for LinkedIn, Intelligent Cloud for Bing, it’s just a way of how things are done, how things can get done using the products or services. 

Reggie: Okay, interesting. Do you see any particular product that is within their ecosystem that will drive a lot of growth going forward? Because I don’t think we can cover every single thing. It’s just too many business models. Let’s let talk about one or two that you think people should know a little bit more about and it will drive Microsoft’s next big leap into the future. 

Thomas: Sure, I think two things. One is Azure. It’s the cloud compute. The second thing would be GitHub. Yeah, these two things actually. Reasons why is that Azure is basically like your AWS (Amazon Web Services) or your Google Cloud compute platform. Very, very commoditized, but you cannot participate in it unless you have certain vast resources under your portfolio. 

What are these certain vast resources? If you were already using a lot of compute or a lot of storage, you have that advantage whereby if you negotiate with some other cloud vendor out there, you say like “oh my god, this kind of thing we can’t do. It’s too large already.” You end up having to build things for yourself and when you build things for ourselves, there’s advantages in scale because you just operate in a domain, which is too huge. When you do that, you can order for certain parts, you can even get the number of people to handle the maintenance for really, really, really good cost effective ratios. Let’s put it that way. 

When you have this, it’s something that only other people, let’s say like Amazon or Google level can do and what you get out of that is oligopoly. You don’t want to get something like a very competitive market and you can price whatever you want and everyone’s actually pretty comfortable where they are. They operate in very similar spaces but even thought they try to eat other’s market, the pie is just so huge for them to go and and eat, moving forward. That’s Azure. 

The trend that’s driving that is basically everyone is just moving to the cloud. You don’t see people storing so much documents on your desktop anymore. It’s going to be hosted in somewhere that’s not on a desktop. Hopefully not your USB… that might change over time. I think that still happens sometimes to transfer things from one to another. 

But the whole idea is that the whole process of storing documents and important part: having people to collaborate with those documents is going to be seamless and that’s why there’s things like Dropbox nowadays, Google drive, Box.com.

In the case of Microsoft, it’s OneDrive. Once this is all in the cloud, you need somewhere to go and store and you have your data in one place… if you want to do some fancy analysis of it, data crunching, you need cloud compute so that’s where that comes in as well. For cloud computing, it’s not like oh, you would just buy some very high spec computer, gaming kind of software, you just run. It’s going to run fast, sure but it’s not going to scale well. 

You’ve got thousands of jobs a day. Each one of them takes like one computer’s worth of compute per job and then you multiply that by a thousand. Are you really going to spend on 1000 computers? Once you reach those kinds of numbers, law of large numbers… something’s going to fail. We’re talking about hundreds, thousands of computers a day running them non-stop. Who’s going to maintain them? Who’s going to replace them? All that is really being done by your big players: AWS, GCP (Google Cloud Platform) and Microsoft. If not, then no one else can initially do either so that’s why it’s Azure. 

As for GitHub, why I say so is because coming from a software engineering background last time, there’s very interesting things that you can do on GitHub that you can’t with others. GitHub has a really nice interface. You can actually search for code and the amazing thing about it is that when you search for code, you can find out how people are actually doing things instead of figuring out things yourself. It’s almost like going to Google for answers but this time, it’s for software engineers. The best part about it is that Microsoft owns this and when you combine this with artificial intelligence, you can actually get very, very crazy results.

Let me share just one thing. Microsoft was able to build an AI that was recommending code to coders based off what they actually farmed from GitHub. This is crazy. It improves the developers’ productivity by a few times because of it. They don’t need to look for code, they don’t need to think of what to write. I mean, it’s just for simple code but it helps a lot because it already helps in how you should actually think about certain designs when you try to build a more complex system but if you have some kind of search and recommendation that’s built on top of the code… the whole repository of the entire world, it’s able to also spot what is a bad design or what is something that can be improved. 

This is something which other companies where… I don’t see actually having it or being able to build, because basically, they don’t have the data to begin with. GitHub is really the largest repository and the most public repository so a lot of people post their open source projects and all that. There’s a lot of contributions that’s being done right for free. You have engineers out there with basically a lot of spare time but because it’s like a passion project, you just keep contributing code and they keep making fixes and improvements and all that.

Imagine that? It’s basically free effort. It’s crazy. They’re also building out things that is quite life-changing for some developer that used to do things very manually and then overnight or maybe (over) a course of a few weeks, some developer introduce a fix which just removes the whole problem altogether.

Imagine this: the code base is increasing means your data keeps increasing and it’s good data and now, you have a search that’s powered on top where you can actually find good examples of it and recommend it immediately to Microsoft’s customers. Very, very powerful to me. 

Reggie: Yeah, pretty crazy. By the way, I think I need to point it out that search is not such an easy thing to set up. We are just so used to be… as a consumer of search, we just Google, we just do all these things. It’s so easy to find and search all the information but I think as an investor or as someone that’s trying to understand business and products, we need to be very cognizant that search is not as easy a product as it is from a user’s standpoint. You need to crunch all these data and you need to be able to sort them out and then you got to be able to find the best way to kind of pick out the best information. It’s actually very complicated so… 

Thomas: Best also differs on perspective because for a person that is searching for a certain term or the way the order of the words or the phrasing is a very different understanding for one person into another person. You have a lot of different segments of people searching for the same thing but actually, they are finding something else. 

Let’s say Google, for example, it’s important for them to get your history or some other points of data to try and to make the search recommendation as accurate as possible, according to your background. 

Reggie: Yes, which is the beauty of YouTube, which the beauty of discovery that YouTube has developed as an extension of Google’s search power. I think that’s pretty interesting, but to clarify, GitHub is an open source platform. They are not monetizing it, am I right to say that at this point in time? Like revenue gen(eration)…

Thomas: There is, there is actually. There’s GitHub Enterprise level where you have more secure features, you have things like access control and all that. You use the same kind of features that you get on GitHub when it’s open source but you get to actually build a wall around it so that other people cannot see it, for example. You also get certain kinds of features, like engineering related stuff like version control, you get a more powerful kind of search, you get that recommendation thing, which is in beta but you get to test it out and you see that… if I pay a subscription to GitHub, I get these services and I enhance my developers’ productivity overnight. It’s that kind of advantage.

So GitHub has that. I think they have a few interesting programs that’s going on also. It’s functioning like a platform. For example, open source projects, it’s completely free in the sense that the code is free to anyone who wants to use it but the person that is working on it, they may actually get something like Patreon to fund them through GitHub. 

Yes, serious. People who are actually interested in the code being developed, they see that there’s a few committed individuals who’s willing to work (on) this, they can back the project as a sponsor. It could be a one-time thing. It could be like a $5 coffee per month kind of thing. There’s different kind of payment plans so there’s a whole platform that’s being built around that as well to keep the engineering effort going for open source projects. 

Shit, that is damn cool. I think all these community-led initiatives as a future ground up a lot of good stuff coming. For Microsoft, it’s a big mammoth. There are all these things but what are some major processes amidst all these different products that we as investors should understand when trying to trying to look at Microsoft? 

I think R & D (Research & Development) for sure. As a tech company moving forward, I think many other companies, they cannot call themselves as other industries. They have to embrace this technology but as a forefront of these technologies itself, they need to R & D a lot. If they just do a misstep out of three years or five years, someone else that comes along who maybe takes one part of their business model, but it’s actually their core strategy. If it’s their core strategy, then there isn’t a need for people to go on board anymore. They actually lose some advantages. They stop being big… 

Reggie: Steve Ballmer.

Thomas: Not saying names, not saying names. This is essential for a tech company to have. R & D on the Azure side of things, you can always make things more scalable. You can always make things more efficient. If you compare head on GCP or AWS, if you are that 1% more efficient, over the long run, let’s say 10 years, it’s got so much more cost savings. 

Your margins just improved tremendously and that also translates to more that you can pump back into your Azure division and you’re looking at it from a finance perspective. Yeah, you can grow sales overnight. You can also do some kind of productivity improvements more. It’s really like a force multiplier. With things that scale, there are indeed a little tweak that you can do inside your process or your systems… makes a lot of difference. 

The other thing would be strategic acquisitions. Microsoft has gotten to a point where it cannot do everything on its own so it may make more sense to actually just buy outright if they want to go into a certain area or they see a certain kind of synergy between their products. 

GitHub, as I mentioned, I think there’s some synergy there when they actually cater to their developers. It’s no longer just the enterprise customers which they are dealing with. Like okay, It’s just Office 365, we’ve got OneDrive, you’ve got Excel and stuff like that. It’s more than that. You’re looking at the next step where every organization are going to have software engineers or at least people that can program. 

If every single organization is going to have it, Microsoft wants to be there to go and support. You don’t see Google doing that yet. You don’t see Apple or Amazon doing that. This is a niche that they want to carve out for themselves: very developer centric with the Visual Studio Code, GitHub, Azure, all the systems that they need to make sure that the engineers are also recommending… “I want to have Microsoft inside this enterprise. If not, I’m not going to work there.” It’s that kind of thing. 

The funny thing is that if you give most software engineers now a Windows laptop to work with, they’ll get seriously mad because there’s certain things that you can do with a Mac which is five or six times faster in terms of the step to solve a problem as compared to Windows. Once Microsoft reaches past that hurdle with GitHub, with Visual Studio Code and all that, it’s going to be the number one thing that engineers are actually looking for. 

Yeah, so very powerful stuff that they can do with their product positioning, their whole roadmap, which they are actually building with the acquisitions, with the synergy and of course, wherever else that’s existing, pulling everyone else forward. That whole ecosystem works to drive more revenue. 

Reggie: Are you concerned that they are acquiring for growth in some ways… I get the whole synergy side of things like GitHub, it’s part of the whole Azure cloud ecosystem and all that. Some acquisitions, I get more direct synergy but some acquisitions… a bit weird like how they outbid Salesforce for LinkedIn. That’s like “really?” And then of course, Xbox is a legacy system since the last management. It’s not a… this management kind of thing and we can talk about Xbox and gaming in the future later. But yeah, how will you rate their acquisition? I’m a little bit concerned when they just kind of buy all sorts of weird things in my view. 

Thomas: Agree, agree. I think the biggest sore sticking out point is that they bought LinkedIn for US$26 billion. It’s way, way high and they outbid Salesforce for that. On the flip side, I think for them, it’s meant to be an acquisition not so much for growth or synergy with the company but for two things. 

Number one: they always wanted a social media kind of platform. Some way or another, they wanted that. The second thing is that it’s actually meant to block other people from acquiring LinkedIn. It’s going to be more painful for them over the long run if Salesforce actually got LinkedIn or even Google was able to get LinkedIn. It’s a dominant platform already, I don’t want anyone else to get it. 

Same case where even for the software engineers, the market for them is so good right now. It’s because there’s a lot of people that will pay for them to go inside the company but just to block them from going to someone else’s. It’s just like that. Facebook does that to Googl. Google does that to Amazon. Tesla does that to Apple… same thing so it’s meant to achieve these two things. 

I think Microsoft… they paid a lot. Whether that price is actually worth it or not, we shall see. I think LinkedIn only contributes about 1% of their revenue right now but by its own, it’s actually still growing. Whether it synergizes to the rest of their ecosystem is a really unknown thing. It could be a very long-term play. 

What I think is that (why) it’s under the productivity and business process is under the HR kind of route so they cater to everyone in organization that uses documents, Excel files, PowerPoint slides. They cater to the HR personnel in achieving the hiring as well as the marketing side of things in the HR perspective. It also cater to the developers so now you have more people inside the organization who will say “why aren’t we using Microsoft? why are we using X or Y other product?” 

There’s also no other… until today, you can correct me if I’m wrong. There’s no other alternative to LinkedIn. If you were to go in and stalk people in the industry and all that, where you want to go? Maybe Twitter? Maybe that’s that, but LinkedIn is where you go for more professional kind of things. People still keep things professional on LinkedIn. They don’t step beyond certain boundaries to go and offend people. You don’t see crazy comments and all that and that has value. 

Say 26 million divided by the number of users on LinkedIn… I think it was $60 per user. In order to get those $60 and their contacts, companies’ emails and stuff like that, maybe it was worth it just to block Salesforce. That is something that Microsoft… thinking it could be priceless. 

Reggie: Fair, fair, fair. I think it’s also important to recognize that for a lot of listeners that only interact with Microsoft from a retail user standpoint or just very small business using standpoint, they don’t recognize that actually Microsoft mostly serve enterprise clients. Their whole ecosystem is built around enterprises whether is it from Azure to GitHub to all their licenses and their suite and their Teams, it’s all enterprise clients and enterprise clients have a certain way of working. 

You open an account in their service provider department and then there’s the whole credit line that works through that process. For a lot of people, you need to understand that actually in enterprise sales, there are a lot of middlemen and they do get kickback. Even Microsoft, they have all these kinds of distributor arrangements. For distributors, the more products you have, the easier it is for them to sell to the end enterprise customer. 

Thomas: You buy this one package, you have this and this and this and this and this and this and this. 

Reggie: Yes, yes, yes and it’s easier for them to clock higher volume and get a higher percentage because in the enterprise sales ecosystem, actually the more you buy from one provider… let’s say if I want to sell Amazon. Amazon has all these different products. It’s a lot easier to clock the sales volume just pushing Amazon compared to… which they may give me a higher distributor kickback compared to selling multiple stuff. 

Because of that distributor enterprise sales process that I think a lot of people may not recognize, I see some value in Microsoft providing a wider suite of solutions that are still all targeted at the enterprise clients. That’s an interesting angle to look at. Maybe down the road, you will see them acquiring other stuff that will solve the problems of enterprise so that’s cool.

Do you want to share with us a little bit about licensing? I think Microsoft has a lot of licensing in the business. That is one part that for a lot of listeners, it may be a little bit more unique to Microsoft because amongst the big tech, not a lot of people do the whole licensing model. I think Microsoft is the biggest so let’s talk a little bit of licensing before we go into revenue segment.

Thomas: I think historically, Microsoft has gone from a very… like you pay for two years kind of thing or you buy this Windows laptop, it already got Windows baked in and the license is only valid for about two years and then you just change your laptop. Now, they have actually fully embraced a very Software as a Service subscription kind of model as part of their licensing strategy. 

What do I mean by that? Instead of two years, you pay for one lump sum or pay annually, that kind of package, you can pay it month by month. Any time you don’t like it, you can just stop. Of course, bundled deals is higher value. There’s bigger discounts and all that, greater amount of time. 

But let’s say you want to use Office 365. You get… say $59 a month, you get the premium version and X and Y and Z but if you top up a little bit more, $10 or $20, I’ll give you free email with 50 gigabytes or 100 gigabytes of storage free. That’s another add on and not just that, they’ll give you more stuff if you pack on more things with your monthly subscription. 

It seems to the user or the enterprise customer “eh, really cheap. I get all these kind of bundled deals.” I don’t need to use some kind of old software any more. I can just use Microsoft and forever, they will stay because you are inside the ecosystem already. You only pay this amount and it makes a lot of sense for companies to shift over into this kind of model. 

So yeah, that’s the licensing aspect of them. It works a lot for Office 365. It may be a bit different for Windows OS but once you are inside these bundled deal, it just comes together. Every month, visually you’re paying only X amount of dollars for a wide range of things that you can do with Microsoft. 

Reggie: Any time someone forces me on a Microsoft Teams call, I know they buy from Microsoft bundle already. Because Microsoft Teams call… the UI (is) not as well-developed but whenever they forced me to do it, then I’ll say “can use Zoom or Google?” and they were like “er no.” Then I was like “okay can. You guys buy Microsoft bundle, right?” 

There’s actually a lot companies that do that and it’s interesting to note that Microsoft actually has a lot of licenses even from the B2B angle, from an enterprise level all the way up to the customer, the end customer. It’s quite a complex model, but of course they have taken some changes over time to do more SaaS style kind of licensing structure.

That’s cool. Okay, so let’s talk a little bit about how should we analyze Microsoft as a company?What are some core metrics that we should look at where we are understanding Microsoft? 

Thomas: Sure, sure, sure. I think the biggest drive for Microsoft would be their cloud so it’s important to look at what’s our market share. Right now, they are at 13%. It seems like rather small so who’s first? It’s AWS at 33%. Actually, Microsoft is second in the worldwide market share for cloud so 30% is actually a bit far but AWS is way, way further but that’s okay because this is like almost three horse race. Who’s third? It’s GCP, it’s Google at 5-6%. You can imagine actually who’s taking the lion’s share… it’s Amazon, right? 

Crazy, crazy revenues from there, but there’s a few spots which it can’t go into also… they can’t capture the entire market. That’s where Microsoft can come in. So far, the reviews have been good. Not many people actually port out of Microsoft or Azure into GCP. GCP has its own slew of issues. You can talk to engineers about it but they will either go for Amazon or Azure which is pretty good. 

Customer service levels… how the engineers actually feel about working in this kind of software. Some will just [indiscernible]… “no, this is crap. I’m not going to work with it” and then you’re in trouble already because they know that it can’t support the way that they do things. Even though you might think like engineer… can be more flexible, right? No, there’s a hard technological constraint which GCP cannot do, which Azure and AWS can. I’ll just put it at there. You can just ask more questions about it. 

Then you look at Office 365. Office 365 is a very mature part of their business but it’s still growing. This is the crazy thing. You want to see how many people are actually upgrading to the next tier because this means that the value of their users… per head in Office 365 or even as a package is increasing so they have advanced to more use cases of Microsoft ecosystem or Office 365 such that they need the higher package. 

When they upgrade, it tends to mean that they will actually stay for longer because they have a greater need to use this part of the Microsoft ecosystem. There’s also a higher chance which they will use the other products within Microsoft and it’s pretty good. Why I say it’s still early in their growth although it’s a mature part of their revenue… it’s rather consistent between the 3 segments that we talked about. It’s 30ish % for each. 

The user base for Office 365 is too early. It’s slightly more than 50% only. This chart here says that basically, the number of people that’s using Office 365 and… sorry, let me rephrase. The number of people that’s using Windows is going to be the same people that is going to use Office 365. You might have chances… they open a Windows computer. They go and log into Chrome browser. They go to use Google G suite or something. Yeah, so there’s cases like that.

But in a company, usually if you’ve got Windows already, you’re going to primarily use Office 365 so you’ll still see the number of Windows operating system upgrades. A number from the old legacy Windows that’s upgrading to the new ones, to which version and all that, that also matters. That’s how you can also tell how many people are going to Office 365. Windows OS also has its own kind of revenue so that helps to look at. You also want to see the IT budgets…

Reggie: You can drink some water first. It’s okay. 

Thomas: Just after this segment. The last bit, I think it’s really IT budgets and the future spending for companies. Everyone’s got an IT budget and how much they are willing to spend on certain kinds of technologies… there’s surveys that’s being done by… I think Gartner. There’s a few others by… what’s this company? Credit Suisse, even.

They have their own research that they want to do. Microsoft is just big, they would definitely cover it every year. We can see how many people is going to take up more Microsoft in the next year and that’s very good because the percentage of budget of the IT spending is going… a large share of it is going to Microsoft. The next one will be Salesforce and the next one will be SAP. SAP is like legacy to the max but it’s not as much as compared to Microsoft. 

This is a… I think like 56% increase in Microsoft spending the next year. This is on average. Salesforce is an increase of 36% and Oracle and IBM is decreasing by about 14 to 15%.

Reggie: That actually double down on the pointers that we were talking about before which is customers of Microsoft is actually enterprise level so if you can provide them more solutions to solve their enterprise level problems, then the budget that goes to you becomes bigger and bigger and just easier. You bundle everything and your per ticket user… per client becomes much bigger and you are seeing from the numbers so that’s an interesting way to look at it. 

Although I do agree that every single business in Microsoft as a product, it can be a little bit different… not a little bit different. They have a lot of different business models. But if you don’t want to go into digging down every single product, which probably you shouldn’t because they are so big. Some product, maybe 1%, 0.5% of revenue. It’s very, very small so you don’t want to go into this rabbit hole of digging down some miracle product that you think will be the future. 

Looking at this kind of big business, you really got to see it from the higher level. I think it doubled down on what we were saying before, which is providing more solutions to your client, which are the enterprises. They will spend more on you. Essentiall, the numbers are showing so that’s pretty cool, pretty interesting. Nice. 

Thomas: Mmm mmm. 

Reggie: I also want to point out that AWS, at a point in time, maybe about five years ago? They had half the market of cloud computing. Of course, cloud computing is very broadly used and it has changed over time. What constitute cloud computing? The thing just keeps growing. Everything now is a cloud, right? It’s like… well, I don’t know. Just cloud. 

It has grown so much, but despite… so everyone is growing. Even though Amazon has a smaller market share today of the total cloud computing space, it is still growing pretty massively, but in other words, it also suggests that Microsoft is really getting that push and doubling down on their product because they have essentially eaten into Amazon’s market share and role to become more and more dominant. That is a pretty interesting observation. Shout out to my friend coding at Microsoft in Seattle. 

So, yes. Good stuff, good stuff. Oh, by the way, I also want to point out that this is a bit of hearsay, but a lot of people say Microsoft don’t have a lot of engineering debt whereas Amazon has a lot of engineering debt. Do you want to share with us a little bit more? What is engineering debt for people that don’t understand? I know it’s a bit of a tangent, but yeah, since we’re on the topic… 

Thomas: Sure. Engineering debt, to most engineers, is things like a decision point where initially, we had to make some crappy decision in the past just to get something done. Sometimes, we need to make timelines and this means that it’s a trade off between doing something in a very hacky way and it’s not well designed and that’s going to cause problems down the road so we kick the can further. That’s engineering debt.

When we kick the can further, then suddenly a new engineer comes in and say “oh my gosh. This is going to take some time to go and build it. Are we going to fix it or are we going to leave it there?” and then they might kick the can down further again. This engineering debt builds and builds and builds to the point where certain things is not scalable to do anymore but it’s still there because it’s a monster by then and that’s the only way that things are being kept running. 

Things are humming in the background, but your interface on the front, it looks very nice but that keeps the company from growing actually. They cannot scale already because it’s not well-designed so it comes to the point where we really sit down and say “we need to go and put some budget into this.” We need a few… X number of engineers to work on this for months to maybe rewrite the code or that part of the code and then the engineering debt resolved then fixed. It’s unblocked. You can do other things. 

Certain companies… the fast growing ones, likelihood is that they have very high engineering debt because the amount of times they have to go and change left and right in their business decisions and all that, it’s a lot and down the road, they will encounter that okay, maybe they have very high engineer attrition rate. They just drop off because it’s just too many things to go and handle. There’s too many things to fix it. We are just patching things on and on and on. You have a bad engineering culture, people leave and that affects your business down the road.

And then you have companies which is more mature, they know what they’re doing, quite experienced ones. Everything’s pretty much scalable already. You got all the tool kits you need to do. You have more engineers actually staying there for the long term. That, in my perspective, is how you can actually differentiate companies with high engineering or low engineering debt…the tenure.

Reggie: Yeah, and it’s a little bit of hearsay so don’t quote me on it. But yeah, people do say… at least my friends, they are engineers in the space of big tech do say that Microsoft has has very low engineering debt and they’re not paiseh (embarrassed) to cut the whole thing and redo. That’s an interesting part so it’s up to you. 

You can go and look at Glassdoor review, look at forum, what have you but I do think it is a, it’s a good thing to note that as a company, they take the development of their product very seriously though so that’s pretty cool. Shall we talk a little bit about the financials of the company? What are their different segments and how are they performing? 

Thomas: I think it’s very nicely split from Microsoft. There are three… productivity and business process, it’s at about 31%. Intelligent Cloud is at 34% and more personal computing, it’s at 35%, the hardware segment. It’s very neatly balanced out and it’s diversified. It might be on purpose also, just fit the numbers. Remember, it’s more of a marketing thing. 

Revenue… I’ve got numbers from Q3 2021 versus 2020 so they did about… sorry, Q2 2021 because the earnings just came out yesterday. Anyway, we can update this for another time, but let’s say the numbers… just comparing Q2 was $41 billion versus $35 billion so that’s a 17% increase compared to the previous year. 

51% of those revenues actually came from the US, 49% from other countries. Again, well diversified geographically, The by-segment… already mentioned, Intelligent Cloud, even (though) it’s like 30%, it’s still one of the fastest growing in terms of operating income segments. After revenues, you calculate by the operating income. It’s also the largest source of profit so your margins are the factors there. 

Basically, for Q2 2021, Azure is just the largest growth. For the recent earnings, it’s the same thing. The next fastest growing one will be Xbox dynamics, which is something like a CRM/ERP (Customer Relationship Management/Enterprise Resource Planning) part of Microsoft as well as LinkedIn. Fastest growing doesn’t mean it’s the highest profit. 

Reggie: Yes.

Thomas: Even though these constitute a smaller portion of the revenue, you know that things are growing. Things are still working in their long tail kind of strategy. Cost-wise, it’s $13 billion compared to $10 billion. It’s a 30% increase but I think that’s okay. They’re already making a lot of revenue.

Operating margin… in some way to… also you want to see translating efficiency in terms of the business process, you can also look at just the margins. It’s 40.15% versus 37%. It’s just crazy. It’s expanding like mad. 

Reggie: For such a [indiscernible] selling software. I think they do have very good margins in this space. 

Thomas: Yeah, so I think things just work and they just do improvements. The subscription just take care of it. You want to upgrade or not upgrade, then just get access to better features quite straight away.

Reggie: I think it’s also important to note that because they are providing more products to the same customer pool, their customer acquisition cost is actually not that high per customer going forward. 

Thomas: Yep, you’re selling back to the same customers.

Reggie: They’re just upselling to the same guys so these mid-size SME… 100, 200 people, they come to you with this problem, then a thousand of them come to you with the same problem. Then Microsoft will be like “okay, let’s go and find something that can solve these guys.” It kind of expands their ticket per enterprise but it also expands their margin because there’s limited marginal increase in costs so that’s pretty interesting. 

Thomas: Cash flows, right? This is just the profit which we already get inside the quarter is $13 billion versus $11.7 billion. It’s a 10% increase but what’s crazy about it is that they are free cash flow. This covers their costs it’s like… okay, one time the cost, done already. It’s like after your net profit, then you don’t have to worry about next quarter, guys. It’s already done. Done and dusted.

If they want to pay down their debt… which they did. They paid $6 billion worth of debt. This was the financing they needed to actually buy LinkedIn. They also pay dividends. They also did share buybacks. This is where a bulk of this cashflow actually went to so I think capital allocation wise, other than this LinkedIn acquisition, they are still giving it back to the shareholders.

Obviously, it’s covering themselves for the next quarter already which is very, very good. Cash in hand is also about the same: $13.7 to $13.5 billion. Every quarter that they are getting these kinds of free cashflow, they’re using it well enough and having this amount of float at anybody in their bank.

Debt wise, it’s pretty heavy: $50 billion versus $59 billion. We see that they’re actually paying down the debt slowly by about 16%, which is kind of nice. Their EPS (Earnings per share) is $2.03 versus $1.14. If you compare just the nine months which they’ve operated is $5.88 versus $4.03. Crazy… this is the amount of money that they actually churned out per share. 

Reggie: Hmm. Yeah, pretty wild. They’re increasing their earnings, reducing their debt, reducing their share. I think there’s nothing much to say about their financials essentially because it’s a big company, very well managed. You don’t get here out of accident so for financials, that’s about it.

But I want to re-emphasize: they are selling to the same customer so per ticket goes up, margin goes up so that is something sexy and for a lot of people that are on the side like myself, looking at Microsoft, you need to know that they don’t just sell consumer products. They are not just a consumer thing that appears on your… when you turn on your computer. There are a lot, a lot bigger. 

So yeah, let’s talk about the management. I think the management play a big part. I mean, you just look at the acquisition over the past few years and all the whole cloud thing, where is it GitHub, LinkedIn and what have you, they all came under the acquisition process of the new management, even the transition to Office 365, Office.com. It’s all under the new management.

The old management, which is the infamous Steve Ballmer did buy Xbox and voted as well, the worst management and what have you. But yeah… so management changed, the tonality changed, things have changed so yes, walk us through this new management. What are some iconic things that they have done and how do you rate them?

Thomas: I think there’s a little story behind the change in management and their culture shift. The CEO now is Satya Nadella but he was actually the VP of Azure back then when he was still reporting to Steve Ballmer. Basically, he’s packing this whole cloud push since the beginning already. He joined since 1992. He’s got a background in engineering and has an MBA whereas for Steve Ballmer, he’s solely… I think, in math and economics so not really a tech background. 

I think this matters because basically under Steve Ballmer, everything about Microsoft is anti open source. That means he wants everything inside the Microsoft ecosystem to be only relying on this enterprise to build up certain things. No one from outside is going to contribute in. Nether is anything from enterprise going to get out so your developers aren’t going to be very excited about working with Microsoft whether it’s the technology or whether it’s the company.

Under Nadella, that has changed a lot. It’s open source first, it’s developers first, cloud centric. Whichever tools they need, they want to be as open as possible so a lot of the tone, a lot of the marketing inside and outside of the company actually changed. I think having Satya Nadella is the CEO is very focused on cloud. It’s very focused on engineering as the key component in Microsoft’s strategy moving forward.

Not just that, not just the CEO. The others inside the senior executive team which we should talk about also have a technical background, even those in the sales and the marketing side of things and I think this is essential. 

There’s Judson Althoff, he’s the chief commercial officer. Previously, he did senior sales in Oracle and EMC. He joined in 2013 so he has been there (for) quite some time. There’s also Chris Capossela. He’s the chief marketing officer… was in Microsoft since 1991 or so, so around the same time as Satya Nadella. 

There’s Kevin Scott. He’s the CTO (Chief Technology Officer) previously at Google, also at LinkedIn. He hosts multiple patents. He’s also a researcher engineer. So you have the tech geek, you have the sales and marketing people who are also tech geeks. You also have the CEO who’s also a tech geek so running a large corporation like that, I think that’s essential. Everyone kind of resonates or understands what the engineering problems are like before crafting solutions for them, not the other way around. I think that matters a lot. 

Reggie: Yeah. I think a lot of people don’t understand sales engineers. It is a very specific role and it’s actually very hard to hire technical salespeople. For everybody that work in HR, you probably know but for everyone else that’s not in the space, it has a lot of value when your sales team understand the technology, rather than you just randomly get some people that sell cosmetic and come and sell IT… 

Thomas: Everything can one. 

Reggie: Can one. Everything can, everything swee (perfect). 

Thomas: Can solve all your problems. 

Reggie: It’s actually very different. Technical sales is very specific so it’s good that… like what you’ve pointed out, even their marketing, their commercial people, they all have some sort of engineering background and they understand the space and the ecosystem in general.

But definitely… based on what Nadella is pushing for, it suggests how they’re going to push forward. During Ballmer’s time, they bought Xbox and what have you. Those are very walled gardens strategy. They want to be like Apple, right? So a lot of those things are kind of… okay, those are the past. 

But you look at where things are now and how the management envisions the future, it also suggests how they acquire certain things, how they build their corporate culture. My friend that’s working at Microsoft is hiking and climbing half the time so it’s like “你不用做工啊? You don’t need to work?” “Aiya, just get the work done. That’s fine.” 

The culture has changed and Microsoft is becoming a sexier place to work also so it’s all part of the whole open source culture, open source idea, community-led and a lot of those things. If you ask me, I generally am quite aligned with this idea and I will rate the management pretty highly. Any thoughts? 

Thomas: No, I think that kind of summarized it. They have a lot of other strong leaders but this is just the key ones on the C-suite level. Going forward, it’s really also on the enterprise level, understanding that the depths, the engineering insight, their enterprise customers also matter. That’s why giving them these kind of support and tools, the board’s direction, the company’s direction matters a lot. 

Reggie: Every mid-sized company will have a tech team going forward. 

Thomas: I think so too. 

Reggie: I think so. Every mid-sized company, not the small guys, but the mid-sized… 100, 200, 300 people, they will have to have their own tech team not to develop things from scratch, but to optimize and change things to meet their own customer’s specific needs because I envision that that’s the future then yeah, I think Microsoft is pretty well-positioned. After talking to you… make me feel like… yeah, maybe I should look at Microsoft a little bit deeper, so that’s good.

Let’s talk about the moats of the company. I think they have a lot of moats and we’ve talked about a lot of them so let’s bring out the few that you think are the most important for our listeners. 

Thomas: I think they have a very strong advantage in that their customers already are big. They also have a lot of enterprise customers that is very varied but as you mentioned, they are reselling… sorry, they are upselling to the same customers so acquisition cost is very low. It’s just like “you want to try new things? Just pay $10 more.” 

It’s that kind of thing so you have the advantage where you have so many users, you also have so many depths inside the enterprise customers’ companies, it’s very easy to upgrade or to bill features because they have very good feedback they need to solve their problems and once you have this close relationship with your customers, it’s very hard to actually unlock these customers and for them to just go elsewhere because they are very loyal to you, you are very loyal to them. You just do what they want. 

That being said… not just building everything that they want, but it’s also prioritizing according to what they want but Microsoft has a say in the direction also because they are that big. If they want to influence how things are being done… let’s say develop a productivity and business process for example, everyone has to use LinkedIn for their hiring needs in the future. They can go along this line and that’s where you see LinkedIn growing the revenues even more because suddenly, they just want to activate this kind of growth strategy though. 

Other than that moat, there’s also this Xbox kind of angle. For them, they already have some kind of foothold into the hardware space. They are not just on the OS level but also on the hardware. I think that matters going forward. There were a few discussions across TFC for Netflix or for Spotify and all that. Those are just content… the medium, the media even. 

When people consume these, it’s very easy for them to just find another kind of media to also consume. It just takes up their attention, but for Sony PlayStation or Xbox, there’s a stickiness to that. You only want to play because it’s on an Xbox, say for Halo… or let’s say on Sony and you want to… or Pokémon, it must be on a Nintendo, right? It’s that kind of thing. It’s very, very nostalgic and you can’t take that away. 

Reggie: Shout out to everyone that bought a Nintendo to play Pokémon. I’m sure that there are a lot of people that did that so all of you, thanks for keeping the economy alive. 

Thomas: I think this is a strong moat because there’s just unique experiences that you craft based off that platform which you can’t get anywhere else so it is a good moat actually.

The other moat they have is definitely their brand. Microsoft is really a big company. It’s very, very stable. When you use their products, you won’t scream for help. I wouldn’t say the same for other kinds of software. It is also seen as one of the best companies to work for so they already have attract… attracting a lot of good talent and they actually stayed there for quite some time.

Another thing is that they are very, very strong in the domains that they’re in already. You won’t see them lose market share overnight. It’s a growing market overall, but they are very entrenched in those areas, those three segments in some way or another and they have that kind of mindset to kill the product at least when it’s not working. You definitely know when things are not working or not but for now they have these strong moats. They are there. They are very, very high walls. 

Reggie: Mmm mmm, and I think that is definitely something to know. When you look at Microsoft, at least for our listeners, when you are studying Microsoft, you may not be able to find the next big thing in terms of growth and what have you. They’re probably pretty advanced in a lot of things that are already doing and they are already one of the top fews in whatever space that they’re in. 

But I think understanding Microsoft gives you a better understanding of the other companies that you’re studying. Let’s say if you are studying Sony, you’re studying Nintendo, then you have to look at what Microsoft is doing with Xbox ecosystem or if you’re trying to look at Oracle or IBM as a company to see whether maybe they can turn around, is there something that’s going to happen? IBM is shutting their turnaround story for the longest time ever and how Oracle has a certain anchor in some of the big software ecosystem also in itself. 

By looking at Microsoft and actively revisiting Microsoft, what are they doing, it gives you a better view of the whole landscape map. Essentially, that’s kind of why I think we wanted to do today’s episode. Not so much about telling you “there’s a big opportunity in Microsoft”… Microsoft is like… everything, they are also doing and they’re executing everything pretty well. It’s one of those episodes where same as Apple, we find it very hard to comment something very witty and counter-culture and some super… like is there something to say about Microsoft?

That’s kind of my base case when I look at Microsoft as a company and why we want to cover it today for all of you listening. Somehow, we are live so we didn’t plan to do this. If you have any questions specific in Microsoft, you can drop in the comment section. If not, this whole part will be cut out. 

So yes, to sum up, although there is so much good things about Microsoft, are there any risk factors or any kind of growth opportunities that you observe for listeners when looking at Microsoft as a company? 

Thomas: For sure. I think Microsoft focuses a lot on the enterprise side of things so there may be still people using Office 365 in that respect, but we cannot also discount it there is a very gradual shift in the non-enterprise… maybe even in enterprise towards G suite. There’s a lot of G suite products that can replicate almost the same, if not more of what Microsoft can do.

Reggie: Dude, our whole team is on G suite. We’re using Slack, we’re using G(oogle) Drive or using all the Google G suite stuff, so Gmail and what have you. 

Thomas: Right, and if you look at the history of Microsoft, they have killed the products fast, yes. But those kinds of products are… also, it means that they are losing that part of the game. For example, do you use Hotmail nowadays? But everyone back then it was like “I have a Gmail, I got a Hotmail. I don’t know which one to use.” Then suddenly, everyone’s just started to use Gmail a lot more. Why? Maybe because a single sign-on is just that much better and Hotmail is like… this looks very clunky. You want to type in your things. You want to sign your things. You don’t see a lot of platforms where you want to sign up… say like you sign up for Netflix. “Activate using your Hotmail.” it’s just not there, right? It’s not the first one already so that has been out of their road map. They’re not going to do that anymore. 

You look at browsers. Are you using Internet Explorer? Are you using Edge? No, right? They are also not very much winning on that consumer software side of things. But Internet Explorer was one of the things which affected a lot of the buying decisions last time in enterprise because most companies that bought into Microsoft said “oh, everyone uses Internet Explorer.” All the software must support Internet Explorer, but now that’s changing because they’re decommissioning it already. They are trying to push out Edge but basically, it’s too new for the enterprise customers to use also and the next best thing that they use is Chrome because everyone’s used to it outside of the company, right? 

Reggie: Shout out to Firefox though. Their internet interface is the most optimized and most efficient… so the least operational, the highest experience is actually Mozilla Firefox. Interesting… anyway, it’s a listed company. We can talk about that another time.

Thomas: Yeah, yeah. Interesting stuff. Browsers… I think this also makes a difference. You can use Firefox but you log into Firefox, you log into Google Drive because it’s faster, maybe. But at the end of the day, the products they use, you see this ecosystem and who is it actually controlled by? Slowly, there’s going to be a gradual shift like “hey, someone thinks that I’m always using Google stuff.” I’ll also want to hunt for other things that’s by Google because the experience is that good so Microsoft has to be a bit careful here. They cannot just sit more and more ground. 

Another one will be search: Google, Bing or Yahoo? Everyone uses Google chat. MSN messenger? Skype? Who uses those? I don’t know. Who uses Teams? Teams is only in enterprise but not on the outside. 

Windows versus Mac. I think this is another big one. If they lose on this front, I think this is a very big risk because basically, if there’s no need for Office 365, no one’s on Windows so this Windows thing has to be looked at very, very closely whether they are losing market share or they are gaining.

[indiscernible], definitely they would choose Mac over it because it’s a Linux. For normal users and all that… well, basically the form factor is good. It can replicate the same thing as Windows. You use a Mac and then use Firefox on a Mac to use Google drive. Nothing’s stopping there, right? It’s platform agnostic. You’re not stuck with something and you are forced to use a certain ecosystem. I think this is something that may become more prominent in the future where the trend of consumers, the trend of enterprises… they don’t want to be stuck on something. They rather have more flexible options. 

The last thing that I think will be a platform war that may occur. Xbox is a good moat for them but that’s right now. Moving forward, where things are going to be… they might need to go and fight with VR and AR. That’s where the trend is starting for… say like Apple, the wearables, Facebook’s Oculus. It’s heading a direction. It’s just starting but I think this is important for large companies to go and look. For Xbox, can they actually keep up with this is unknown. Whether they have enough content that’s going to come on board for VR and AR, this is also unknown. Until now, I haven’t seen Microsoft…

Reggie: Not that many… It doesn’t sound like it’s their main push compared to everyone else. Amazon, Apple, Google, Facebook, they all have a bigger content strategy. I didn’t say Netflix because they are all about content only. Compared to Microsoft, they are all putting more in content. 

Thomas: From a moat perspective, I think they have a really strong moat but the biggest risk overall are like what we’ve discussed is getting complacent. They just have enough ready and then they stop growing and that’s where you see other companies start to take over. Maybe even one small company taking up one small segment of their business model and then slowly another one and slowly another one and then before you have it, Microsoft becomes a smaller company. That is a risk, ultimately. 

A lot of different growth opportunities for sure but it’s to do with the maturing customers that they have, upselling their existing things that they have. The biggest one would be the JEDI (Joint Enterprise Defense Infrastructure) contract with the US Department of Defense but that is back to the drawing board. They’re going to have to fight with Amazon and a few other players for it. It’s a $10 billion contract. It’s a very big one. 

I think Microsoft is in a pretty interesting space. It’s definitely growing but yeah, risk of getting complacent as with any large company.

Reggie: Yeah. I think Palantir will win the DOD contract… different business altogether. But yeah, in general, I think I agree with you. The pointers are very fair in a sense of… Microsoft is dominant in wherever they are but you are seeing a lot of trends not in their benefit. More and more… younger companies are not starting out with Office 365. They are starting out with SaaS products that they plug from their friends. We use Airtable, Notion, Slack and as we scale, we may optimize certain things, but I never entertained the idea… maybe when the sales person can come and call me and “hey, you know, maybe you guys should use Microsoft” and then I’ll start calling everybody in Microsoft Teams.

But that’s not the current structure. A lot of the younger enterprises are doing things a little bit differently. Whether the platform can continue to be sticky and innovate, I think that all adds to the value of Microsoft as a business so those are good risk factors to be aware of.

But all that being said, it is too big to immediately next quarter double or next year double… it’s not so easy. It’s not a startup that is trying to dig market share and if let’s say growth declines, then the whole share price will just come crashing because people are pricing all the growth.

It is just good to know that if you start observing them losing out in certain spaces, it may fundamentally challenge their business model, right? So it is not a next year or next quarter kind of thing, but it can be a few years if you see the competition ramp up and some parts of Microsoft’s business may become obsolete or at least lose a very big chunk. 

So yeah. Good stuff. Any last things to add, Thomas? If all of you listening live, somehow, a few of you, if have any questions during the comments, if not, we’re going to sum up today. Any last things you want to add for Microsoft? 

Thomas: Yeah. I think the earnings just came out yesterday. You can go check it out, but basically the net income increased by 47%. It’s insane stuff. Windows’ revenue actually gets affected by supply constraints from their device makers. I think we will cover this on the weekly market updates a little bit more. But yeah, they are definitely also having some risk on the supply chain aspect.

Reggie: It seems like only Elon Musk is the only one with no risks on the chips. Yeah, we’ll talk about that on the weekly market update next week so that’s a teaser for all of you that just somehow tuned in. Join us next to stay for the weekly market updates of latest stuff in the market.

So yeah. Join our Telegram group. Sign up for our weekly newsletter. Go to thefinancialcoconut.com to put your emails so that you get a monthly update of what is going on in the markets. Any questions, come to our Telegram group. I’ll see you guys. Take care. Thanks Thomas. 

I hope you learnt something today and definitely recognize that investing is a personal decision. We’re not here to give you any recommendations but we’re always happy to geek out with you on interesting companies and trends for the future.

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