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In companies with many office jobs, Microsoft products are primarily used. This includes Word, Excel, PowerPoint, and the Windows operating system. If a computer is not using Apple's Macintosh, it can be assumed that it is running Windows. This is why Microsoft has become a point of interest. As everyone knows, Microsoft was founded in 1975 by Bill Gates and Paul Allen. It gained popularity and grew after the MS-DOS (Microsoft Disk Operating System), developed under a contract to create an operating system for IBM PCs, was popularized in 1981. Subsequently, the development of MS-Windows allowed it to capture nearly 90% of the personal operating system market, and MS-Office programs have also grown into a massive software company with a large user base worldwide. In 2001, Microsoft launched the Xbox gaming console, and in 2011, it acquired Skype for $8.5 billion. In 2016, it acquired LinkedIn for $26.2 billion, seeking to expand its platform business.
When it went public on NASDAQ in 1986, the offering price was $21. As of March 20, 2020, the price had risen to $140, which might lead to the misconception that it has only increased sevenfold over that period. However, there have been multiple stock splits. When accounting for these splits, the offering price effectively becomes $0.08, resulting in an increase of over 1,500 times. Today, Microsoft is one of the largest companies by market capitalization, consistently growing.
Microsoft's business areas can be broadly categorized into three segments.
The first is Productivity and Business Processes, which includes software and platform businesses such as Office 365, LinkedIn, and Dynamics. Microsoft Office is a well-known product used globally. Although there were issues with illegal users, switching to a subscription model with Office 365 reduced the number of illegal users and increased revenue. LinkedIn, acquired for $26.2 billion in 2016, is the world's largest job search platform and has shown steady growth.
The second segment is Intelligent Cloud, which encompasses the Azure cloud platform. This segment has grown by over 60% compared to the previous year and continues to expand. Azure is a rapidly growing future industry that supports various fields, including application development and cloud infrastructure. As of 2019, it held a 17% market share, ranking second, and is expected to continue growing as the global market expands. In 2019, Azure generated $18.1 billion in revenue, reflecting a 64% growth.
The third segment is More Personal Computing, represented by Windows 10, which has shown steady growth and holds a 50% market share.
According to the conference call for the second quarter of 2020 (covering October to December 2019), growth rates across most business areas increased. Azure revenue saw the largest increase, with Office 365 growing by 30%, server-related services by 32%, Windows by 18%, and LinkedIn by 26%, showing growth of at least 7% and up to 64% compared to the previous quarter. The Xbox gaming segment, however, experienced a 9% decline.
Recently, due to the COVID-19 pandemic, the U.S. stock market has experienced significant fluctuations. Microsoft's stock price rose to $188 but has since dropped to around $140, indicating an economic contraction due to the pandemic. Microsoft's market capitalization stands at $1 trillion, equivalent to approximately 1,000 trillion won in Korean currency (based on an exchange rate of 1 dollar = 1,000 won). In comparison, Samsung Electronics, the largest company in the Korean stock market, has a market capitalization of about 300 trillion won, highlighting Microsoft's immense scale. Despite this, its price-to-earnings ratio (PER) is 25.53, suggesting a net income of 43 trillion won. The net income is also substantial, with dividends at $2.04 per share, distributed quarterly at about $0.50.
Over the past five years, Microsoft's performance has shown consistent growth. Notably, since the launch of Azure in 2017, revenue growth has accelerated. Revenue increased from 89 trillion won in 2016 to 110 trillion won in 2017, marking over 20% growth. Meanwhile, the increase in cost of goods sold has been modest, resulting in a relatively high operating profit margin. Operating profit rose from 21 trillion won in 2015 to 49 trillion won in 2019, more than doubling. Net income also increased significantly, reaching 44 trillion won in 2019, more than double the 16 trillion won in 2015. It is remarkable that such a large company continues to grow.
Microsoft's fiscal year ends in June. Its debt ratio is 79%, which is very favorable. Funding is not an issue for operating such a large company. The operating profit margin is 36%, and the net profit margin is 33%, indicating an overall high profitability.
Since transitioning to a cloud service model with Office 365 in 2013, Microsoft has made it available for free to students and teachers, ultimately aimed at securing future customers. This free offering is one of the strategies to capture the global market. While revenue from this segment may not be explosive, it serves as a steadily rising cash cow. It will be interesting to observe how far the growth of such a large company can go.
