Microsoft was born in an Albuquerque garage in 1975. Co-founders Bill Gates and Paul Allen wanted to create software to run on an early personal computer known as the Altair 8800. The name “Microsoft” comes from a mashup of “microprocessors” and “software.” Like many successful tech companies, Microsoft’s growth was fast and furious.
By 1980, the company had struck a deal to provide the operating system for IBM computers. Windows was released in 1985, transforming the computer world to this day. By the late 1980s, Microsoft was already the world’s largest personal-computer software company.
Here’s a snapshot of the current state of Microsoft, along with a discussion of the company’s history, value and future outlook.
|Founders||Bill Gates and Paul Allen|
|Share Price, 52-Week Range||$213.43 – $366.78|
|Fiscal Year 2023 Revenue||$211,915,000,000|
|GOBankingRates’ Evaluation of Microsoft’s Net Worth||$646,551,833,333|
Microsoft Reaches $2 Trillion
On April 25, 2019, Microsoft made market history when it was valued at $1 trillion for the first time. As of the close of business on Oct. 4, 2019, its value had climbed to $1.042 trillion, and now it’s over $2 trillion. But what does it mean to say a company “is valued” at $2 trillion? Market pundits use market capitalization to determine how much a company is worth.
Market capitalization is simply the number of outstanding stock shares a company has issued times its current market price. So, for example, if a company has issued 1 million shares of stock and its share price is $50, the company has a market capitalization of $50 million. Microsoft had 7.44 billion shares outstanding on Aug. 4, so 7.44 billion times $327.78, its closing stock price on Aug. 4, equaled about $2.44 trillion in market capitalization.
Market capitalization is a way to make apples-to-apples comparisons of the sizes of various companies. Berkshire Hathaway, for example, was trading at $533,600 on Aug. 4. Its market cap, however, was only $788.19 billion, despite its enormous per-share price. Market cap helps investors evaluate the different sizes of companies, regardless of their share prices.
Market cap does have its drawbacks as an evaluation method, however. For starters, market cap changes frequently, and it’s closely tied to the company’s current share price. It doesn’t take into account any of the direct financial metrics of the company, such as earnings per share, growth rate or book value.
By way of comparison, the price-earnings ratio, which is another popular valuation method, is also closely tied to a company’s market share price. The P/E ratio also relies heavily on a company’s earnings, however, which some investors feel is a more important determinant of a company’s valuation. Microsoft’s P/E ratio is 35.78.
Microsoft’s Market Cap: $2.45 Trillion
Investors use various metrics to value companies, but in terms of market capitalization — which is one of the most popular — Microsoft is currently the third most valuable company in the world. With its market capitalization topping $2 trillion, Microsoft is an enormous giant of a company by any metric. Yet investors can still buy into the company for less than $350 per share, as of Aug. 7.
Microsoft’s market cap varies from moment to moment based primarily on its share price. Although an increase in outstanding shares could also increase its market cap, that type of change occurs far less frequently than a change in share price, which can occur in less than one second. Thus, the ups and downs of Microsoft’s share price can result in a wide valuation range for the company.
As of Aug. 7, Microsoft has a market cap of $2.45 trillion.
Microsoft’s Net Worth: $646.55 Billion
In its simplest form, net worth is simply a company’s assets minus its liabilities. By this metric, which is also referred to as shareholders’ equity, Microsoft’s net worth as of the quarter ending June 30, 2023, was $205.75 billion.
Of course, methods of determining the value of a company are wide and varied, each with its own merits and blind spots.
GOBankingRates uses company data to calculate net worth in a slightly different manner. The GOBankingRates Evaluation of a company’s net worth is a calculation based solely on concrete, measurable figures like assets and revenue. It’s a more conservative valuation than most, taking into account only full-year profits and revenue from the last three years and the company’s assets and debts.
By this GOBankingRates metric, Microsoft’s net worth is currently $646,551,833,333.
For some investors, net worth is a much more compelling valuation than market cap.
Microsoft’s Founders: Bill Gates and Paul Allen
Microsoft co-founders Bill Gates and Paul Allen met in Seattle as teenagers in the late 1960s. When a computer arrived at their school, it was a momentous occasion, as computers were rare and expensive in those days. Soon, Gates and Allen were spending all of their free time working on and with computers.
Gates admits that he looked up to Allen, who was two years older than him and had an obsession with how computers would change the world. When Allen showed Gates a newspaper article about how the Altair 8800 had just been released, the duo felt they were already behind. Gates immediately dropped out of university and co-founded Microsoft with Allen.
Key Product Lines Contributing to Revenue
Microsoft is a vast company, but it breaks down its operating revenue into three broad segments: Productivity and Business Processes, Intelligent Cloud and More Personal Computing.
Microsoft Office and LinkedIn are among the revenue producers in the Productivity and Business Processes segment, while Intelligent Cloud encompasses server products, cloud services, including Azure, and Enterprise Services. The More Personal Computing segment includes devices, such as the Microsoft Surface, the Xbox and all Windows operating system-related revenues, as well as search and news advertising.
Here is the revenue reported by operating segment for the fourth quarter of fiscal year 2023, which ended June 30:
- Productivity and Business Processes: $18.3 billion, up 10% compared to Q4 2022
- Intelligent Cloud: $24 billion, up 15% compared to Q4 2022
- More Personal Computing: $13.9 billion, down 4% compared to Q4 2022
All in all, the company reported quarterly revenue of approximately $56.2 billion, an increase of 8% compared to the same quarter last year.
Microsoft’s Top Shareholders
The top 10 shareholders of Microsoft stock are all asset managers/mutual fund companies. As a group, institutional shareholders own a whopping 73.21% of all Microsoft shares.
- The Vanguard Group, 8.74% of shares
- BlackRock Inc., 7.24% of shares
- State Street Corp., 3.93% of shares
- FMR LLC, 2.70% of shares
- T. Rowe Price Associates, 2.23% of shares
- Geode Capital Management, 1.94% of shares
- Morgan Stanley, 1.62% of shares
- JPMorgan Chase & Co., 1.27% of shares
- Capital World Investors, 1.18% of shares
- Norges Bank Investment Management, 1.16% of shares
If you own a mutual fund, you likely own a piece of Microsoft yourself. Here’s a look at what percentage of the company is owned by popular mutual funds:
- Vanguard Total Stock Market Index Fund, 3.04% of shares
- Vanguard 500 Index Fund, 2.32% of shares
- Fidelity 500 Index Fund, 1.10% of shares
- SPDR S&P 500 ETF Trust, 1.08% of shares
- Invesco QQQ Trust, Series 1, 1.01% of shares
- iShares Core S&P 500 ETF, 0.89% of shares
- Vanguard Growth Index Fund, 0.85% of shares
- Vanguard Institutional Index Fund, 0.70% of shares
- Growth Fund Of America Inc., 0.55% of shares
- Vanguard Information Technology Index Fund, 0.46% of shares
All of these shareholders may change their level of investment at any time — even dropping it down to 0%. But since Microsoft is such an important company to the market overall, these percentages are not likely to change by a great amount. This lack of change is particularly true for the index funds on the list, as by fund mandate, they are required to match the company’s weighting in their respective index.
How Does the Future Look for Microsoft?
It’s hard to argue against the merits of a company laying claim to the title of being the third largest in the world. Clearly, Microsoft is a hugely profitable company. If you have ever worked on a computer, it’s highly likely you have used Microsoft products.
Stocks that are market leaders often tend to continue to lead, and as the saying goes, the rich tend to get richer. But what are the nuts and bolts when it comes to the future of Microsoft?
Judging by recent trends, the future seems to look rosy for Microsoft. The company’s fourth-quarter 2023 earnings and revenue report, released on July 25, included guidance for the first quarter of 2024 that fell short of analysts’ expectations. However, Q4 2023 revenue and earnings both exceeded Refinitiv analysts’ expectations, according to CNBC.
Looking ahead, Microsoft expects revenue growth in its Productivity and Business Processes and Intelligent Cloud segments. More Personal Computing, however, is expected to be negatively impacted by a decline in Windows revenue and, in response to the overall PC market, a steeper decline in devices revenue.
Microsoft received a “buy” or “strong buy” rating for August from 27 of 34 analysts on Yahoo Finance, and six of the remaining seven rated it a “hold.” Just one rated the stock a “sell.” The current average target price is $387.08, which is about 17% above its current price.
Should You Invest In Microsoft?
Investing in a specific stock involves much more than analyzing the profitability of a given company. Your financial situation plays a large part in determining whether or not you should invest in stocks at all — let alone invest in a specific stock like Microsoft. Working with a fiduciary financial advisor is a good way to delineate your investment objectives, risk tolerance and personal financial situation to determine if investing in stocks is a good match for you.
Regarding an investment in Microsoft specifically, the company seems like a good bet as part of a diversified portfolio. It continues to report strong earnings, and Wall Street analysts tout the stock as a buy or strong buy, targeting 12-month price gains of about 17%.
Daria Uhlig contributed to the reporting for this article.
Data was compiled on Aug. 4 and Aug. 7, 2023, and is subject to change.
Methodology: The GOBankingRates Evaluation assesses a company’s net worth based on the company’s total assets, total liabilities, and revenue and net income from the last three years. Base value is established by subtracting total liabilities from total assets from the company’s last full fiscal year. Income value is established by taking the average of the revenue from the last three full fiscal years, plus 10 times the average of the net profits from the last three full fiscal years, and then calculating the average of those two figures. The final GOBankingRates Evaluation number is the sum of the base value and the income value.
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