Investors use various metrics to value companies, but in terms of market capitalization — which is one of the most popular — Microsoft is currently the most valuable company in the world. With its market capitalization recently topping $1 trillion, Microsoft is an enormous giant of a company by any metric. Yet, investors can still buy into the company for less than $140 per share, as of early October 2019.
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 mash-up of “microprocessors” and “software.” Like many successful tech companies, their growth was fast and furious.
By 1980, the company 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.
Now, the company is in a daily battle with Apple for the title of the world’s most valuable company. Some interesting facts about Microsoft that many people might not know include the following:
- Microsoft has the second-largest artificial intelligence patent portfolio in the world, behind IBM
- Microsoft recently allowed open access for any developer in the world to use its patent portfolio for no licensing fee when it joined the Open Invention Network
- The man behind the dreamy Windows 95 startup sound is musician Brian Eno
Here’s a snapshot of the current state of Microsoft, along with a discussion of the company’s history, value and future outlook.
|Microsoft: Company Snapshot|
|Founders||Bill Gates and Paul Allen|
- Microsoft Reaches $1 Trillion
- Microsoft Market Cap Range
- Microsoft Net Worth
- Founders: Bill Gates and Paul Allen
- Key Product Lines Contributing To Revenue
- Current Top Shareholders
- How Does the Future Look for Microsoft?
- Should I Invest In Microsoft?
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. But what does it mean to say a company “is valued” at $1 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 currently has 7.64 billion shares outstanding, so 7.64 billion times the closing stock price of $138.12 equals about $1.05 trillion.
Market capitalization is a way to make apples-to-apples comparisons of the sizes of various companies. Berkshire Hathaway, for example, had a closing price on Oct. 4, 2019, of $312,524 per share. Its market cap, however, was only $515.08 billion, in spite of 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 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. Here is Microsoft’s share price range over the past 52 weeks:
Share price: $93.96-$142.37
As a result, Microsoft’s market cap over that same period has also fluctuated in this range:
Market cap range: $717,854,400,000-$1,087,706,800,000
Thus, the ups and downs of Microsoft’s share price can result in a wide valuation range for the company.
In its simplest form, net worth is simply a company’s assets minus its liabilities. By this metric, Microsoft’s net worth as of the quarter ending June 30, 2019, was $1.0233 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 company net worth is a calculation of a company’s worth 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 $519,875,667.
See Also: How Much Is Google Worth?
For some investors, net worth is a much more compelling valuation than market cap. In fact, another name for company net worth is shareholders’ equity.
For accounting purposes, this means that Microsoft’s net worth is the true value of the company, in the sense that it defines the actual value collectively held by shareholders. Of course, various accounting methods can alter the amount of net worth that a company actually reports, so shareholders’ equity is not necessarily the authoritative guide to a company’s valuation either.
|What Is Microsoft Worth?|
|Share Price, 52-week range||$93.96-$142.37|
|Market Cap, 52-week range||$717,854,400,000-$1,087,706,800,000|
|Fiscal Year 2019 Revenue||$125,843,000,000|
|Fiscal Year 2019 Profit||$82,933,000,000|
|GOBankingRates’ Evaluation of Microsoft Net Worth||$519,875,667|
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.
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 and Enterprise Services. The More Personal Computing segment includes devices, such as the Microsoft Surface, the Xbox and all Windows operating system-related revenues.
Here is the revenue reported by operating segment for the fiscal year 2019, which ended June 30, 2019:
- Productivity and Business Processes: $41,160,000,000
- Intelligent Cloud: $38,985,000,000
- More Personal Computing: $45,698,000,000
All-in-all, the company reported annual revenue of more than $125 billion.
Sharing the Wealth: Microsoft Co-Founder Paul Allen Gave Away $2 Billion Before His Passing
The top 10 shareholders of Microsoft stock are all asset managers/mutual fund companies. As a group, institutional shareholders own a whopping 74.78% of all Microsoft shares. Individual holders only own 6.17% of Microsoft stock. One institution, Capital Research & Management, occupies three of the top 10 shareholder slots, as the ownership is distributed among three separate divisions. When those divisions are combined into a single entity, here’s what the top shareholders list looks like:
- The Vanguard Group, 7.89% of shares
- Capital Research & Management, 4.88% of shares
- BlackRock Fund Advisors, 4.44% of shares
- SSGA Funds Management, 4.10% of shares
- Fidelity Management & Research Co., 3.00% of shares
- T. Rowe Price Associates, 2.54% of shares
- Geode Capital Management, 1.37% of shares
- Northern Trust Investments, 1.26% 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, 2.81% of shares
- Vanguard 500 Index Fund, 2.00% of shares
- SPDR S&P 500 exchange-traded fund, 1.07% of shares
- The Government Pension Fund – Global, 0.96% of shares
- Vanguard Institutional Index Fund, 0.92% of shares
- American Funds Growth Fund of America, 0.89% of shares
- Fidelity 500 Index Fund, 0.83% of shares
- Invesco QQQ Trust, 0.80% of shares
- iShares Core S&P 500 ETF, 0.75% of shares
- Vanguard Growth Index Fund, 0.72% 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.
It’s hard to argue against the merits of a company laying claim to the title of being the 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?
If judging by recent trends, the future seems to look rosy for Microsoft. On Oct. 2, 2019, the company released a host of new products in its Surface line, with five new products arriving in time for the holiday season and two dual-screen devices — the Surface Duo and the Surface Neo — arriving by the 2020 holiday season.
On the earnings front, the company reported revenue of $33.7 billion for the quarter ending June 30, 2019, an increase of 12%. Operating income showed a 20% jump, up to $12.4 billion, whereas net income rose by a whopping 49%, to $13.2 billion.
Chief executive officer Satya Nadella described the results as “a record fiscal year for Microsoft,” noting that the company’s commitment to customer success ” … is resulting in larger, multiyear commercial cloud agreements and growing momentum across every layer of our technology stack.”
Wall Street analysts tend to agree, with the average rating among 14 analysts covering the stock being “strong buy.” The current average price target among these analysts is $153.48, roughly 11% above where the stock was trading in early October 2019.
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. The company continues to report record earnings, its CEO is optimistic for the future, and Wall Street analysts tout the stock as a strong buy, targeting 12-month price gains in the double digits.
As Robert R. Johnson, professor of Finance, Heider College of Business, Creighton University puts it:
“You want to invest in companies that have a business model that stands the test of time. That is, firms with durable competitive advantages. Warren Buffett refers to these as economic moats…Microsoft has four…moats…It has high switching costs, as once one utilizes the Microsoft Office suite, it would be costly (in terms of time and effort) to switch to a competitor. The firm possesses a network effect, as the Microsoft Office suite products complement each other. The firm obviously has efficient scale. Finally, it has a tremendous intangible asset — its brand name, according to Forbes…is the third most valuable brand in the world — worth over $125 billion. Only Apple and Google have more valuable brands. In summary, Microsoft has an extremely bright future.”
If you want to learn more and buy Microsoft stock, contact one of the best brokers, as ranked by GOBankingRates, and you’ll be on your way.
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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.