Industry trends and outlook
In 2023, there are several trends in the technology industry that could impact Microsoft Corp.'s (MSFT, Financial) financial performance and market valuation. They collectively provide the company with a massive opportunity to expand its total addressable market (TAM). As a result, while I believe Microsoft remains fairly valued at this time, it could easily break to new time highs in 2023 due to growth. In today's analysis, we explore the main technologies that will drive Microsoft's revenues in the following years.
Cloud computing
As per Meticulous Research, the cloud computing market is projected to reach $1.40 trillion in size by 2030, with a 16.8% CAGR from 2023 to 2030. Microsoft's Azure expanded its market share to 23% (from 21%) in the last reported quarter. The addressable market for cloud computing will continue to expand remarkably as more companies move their operations and data to the cloud. Microsoft's Azure platform is well-positioned to benefit from this trend, capturing market share aggressively. In addition, the company is investing considerably in cloud engineering to stay competitive in the cloud market, as observed in enhanced operating expenses.
Source: techcrunch
Artificial intelligence
According to Research and Markets, the artificial intelligence (AI) market is progressing towards attaining $1.83 trillion by 2030 in size, at a 32.9% CAGR from 2022 to 2030. The primary drivers for AI's rapid expansion are increased adoption and demand in health care, deep learning, neural networks and smart technologies. As a result, AI is expected to become increasingly prevalent in the next few years. Microsoft has already made significant investments (such as the acquisition of Nuance Communications) in this area.
The company's AI platform, Microsoft Cognitive Services, is already used by businesses and developers to build AI-powered applications. Moreover, AI hype and advancements will continue to benefit Microsoft's stock due to its more aggressive integration of AI in its product portfolio through in-house developments and external collaborations, such as with OpenAI through a $10 billion investment in ChatGPT.
AI-powered Bing and Edge will be a vital business opportunity
AI has the potential to transform many industries, including the search and web browser markets, and Microsoft is strategically capitalizing on this opportunity with its Bing and Edge products through joint R&D with OpenAI on next-generation models that boost the ChatGPT's performance with Bing's real-time information.
As per Microsoft, one point of search and ad market share gain is expected to lead to a $2 billion revenue opportunity. Fundamentally, Microsoft's AI-powered Bing and Edge will offer many benefits to users and businesses. For example, users can enjoy more accurate and relevant content with improved search results and intelligent web browsing. In addition, personalized experiences based on their browsing and search histories enhance their overall experience.
Furthermore, improved ad targeting using AI algorithms offers higher value to advertisers, driving new advertising revenue and other business opportunities for Microsoft. These innovative features have the potential to significantly boost Microsoft's position in the search and web browser markets and further increase user engagement with its products.
Internet of Things
As per Insight Partners, a 29.4% CAGR could extend the Internet of Things (IoT) market size to $2.27 trillion by 2028 worldwide. IoT is a rapidly growing market, and Microsoft has already invested in this area through its Azure IoT platform. Microsoft's Azure IoT is currently holding a 16.54% market share according to Slintel. In 2023, IoT is expected to become increasingly important for Microsoft as more devices become connected. Microsoft has the most diversified product and service portfolio to address the expanding need for secure and efficient IoT solutions.
Remote work
Fortune Business Insights estimates the global team collaboration software market could grow at a CAGR of 13.2% from 2022 to 2028, hitting $40.79 billion in 2028. The Covid-19 pandemic has accelerated the remote work trend, which is expected to continue in the coming years. Microsoft has already adapted to this trend with collaboration tools like Teams, and the company is expected to continue developing and expanding its offerings in this area.
Cybersecurity
As per Next Move Strategy Consulting, the cybersecurity market is expected to reach $657.02 billion by 2030 globally, at a 12.8% CAGR from 2022 to 2030. At the same time, Mckinsey expects the global cybersecurity market to reach between $1.5 and $2 trillion. With the increasing cyber threats, the addressable market for cybersecurity products and services is projected to grow in 2023 and beyond. Microsoft has a strong offering in this area through its Microsoft Defender product, and the company is expected to maintain its investments in this field to stay ahead of the competition.
Search and online advertising
As per Astute Analytica, the internet advertising market is projected to expand to $4.68 trillion in global valuation by 2031, at a CAGR of 29.9% during the forecast period of 2023 to 2031. Microsoft holds 3.03% of the search engine market against Alphabet's (GOOG, Financial)(GOOGL, Financial) Google's 92.9%. In the digital ad industry, Microsoft has 3.7% of the market against Google's and Meta's (METAk) dominance of half the market revenue. AI-powered Edge and Bing could expand the market share of Microsoft meaningfully in 2023 by taking advantage of first-mover push and strategic investments such as the integration of ChatGPT in the browser and search engine. Therefore, 2023 will be critical for Microsoft's demonstration of performance and efficiency in the field. We will soon see whether it can really challenge Google's dominance.
Source: Hollywood Reporter
Foreign currency fluctuations and quantitative tightening
In 2023, a stronger U.S. dollar will continue to impact Microsoft's financial performance and market valuations. This is because the company operates in various countries, and a stronger U.S. dollar can reduce the value of sales in countries with weaker currencies, impact earnings due to expenses denominated in foreign currencies and potentially resulting in lower market valuations due to investor caution towards currency fluctuations.
Benchmark rate hikes by the Federal Reserve can also impact Microsoft's financial performance and market valuations. Interest rate hikes can increase the company's borrowing cost, leading to higher interest expenses and negatively impacting earnings, though it should be noted Microsoft is very financially strong so this is not as much of a concern. More importantly, these hikes may affect Microsoft's ability to take on enough debt to pay for its many ambitious growth projects going forward.
As per the sensitivity analysis by Microsoft, its revenue and investment could experience an adverse impact of $7.99 billion based on a 10% unfavorable move in exchange rates. Similarly, a 100 basis point hike in Treasury rates could deliver an adverse hit of $2.11 billion in its financial performance.
Microsoft implements hedging strategies such as currency forwards, options and swaps, but these strategies have delivered a net loss on derivatives and foreign currency remeasurements of over $217 million in the recent quarter. The dollar's strength and levels of the benchmark rate will be decisive factors in shaping its financial performance and market valuations, which investors must keep an eye on.
Strategic and competitive analysis
Microsoft's primary focus is on expanding its cloud computing and AI offerings through its Azure platform. As a result, the company is experiencing stiff competition from major players such as Amazon Web Services (AMZN, Financial), Google Cloud and IBM Cloud (IBM, Financial). Despite this, Microsoft maintains a strong market position due to its established brand, extensive product portfolio and large customer base.
The company's business model remains centered on its software and cloud offerings, with significant revenue generated from its Windows operating systems, Office productivity software and cloud computing services. Microsoft's financial performance is expected to be strong, with its position in growing markets and diverse customer base providing a solid foundation. However, the company's massive investments in its cloud and AI offerings help it stay ahead of its competitors and maintain its financial performance in improved economic conditions and market recovery in 2023.
Concluding thoughts
Microsoft's total addressable market has grown thanks to the company's emphasis on innovation and business alliances. Microsoft is well-positioned to take advantage of the opportunities given by its growing market because of its wide range of product offerings, which include operating systems, office software, gaming and cloud services. In addition, Microsoft's ability to stay ahead of the curve and adjust to shifting market dynamics will be crucial to its success as the global technology landscape changes.
