As of 7/15/2020. The following article is strictly the opinion of the author and is to not be considered financial/investment advice. Call to Leap LLC and the author of this article does not claim to be a registered financial advisor (RIA) or financial advisor. Please visit our terms of service and privacy policy before reading this article.
Let's get straight to the point: the top tech stock that I believe is a good long-term investment is Microsoft (MSFT). This company is part of the DOW30, meaning it’s one of the top 30 companies in the United States.
So what is it that Microsoft actually sells? Of course, we often recognize Microsoft as a company being founded by Bill Gates and selling their PCs, laptops, and tablets, like their Surface products. This company has been extremely popular ever since the 90’s when they introduced their Office products, like Microsoft Word, Powerpoint, and Excel. Now, they’ve created even more apps such as OneNote, Outlook, Access, and Publisher. Even their legendary Windows operating system, which came out in 1985, is still in use today by large corporations, businesses, schools, and personal use. If you can remember the good ol' days, they used to sell each of their products by CD. Now, with the rise of the internet, they sell online subscriptions to these products where users have to pay every month or year.
Taking a look at Microsoft’s main website, you can see they sell their Windows 10 Home edition for $139 and Pro edition for $200. Shifting over to their Microsoft 365 app pricing, you can see that they charge $100 per year for the family plan, $70 per year for the personal plan, and $150 for a one-time installation of their classic apps.
It gets even more exciting from here with their business plans. You can see that they can charge up to $20 per user per month with an annual commitment. So, if a business has 1000 employees using Microsoft’s apps, 1000 employees times $20 times 12 months comes out to be $240,000 per year!
I personally believe that companies with subscription business models are the way to go because it locks in users by having them commit to paying every month or year. Let’s be real here, let’s say you don’t use Microsoft Word or Excel for a while. Are you going to stop your subscription for like two months? I don't think so. You’ll probably keep on paying because you’ll feel it’s a hassle to go through the cancelation process and then resubscribe when you need to use the apps again.
Microsoft is also very strategic in getting their customers to use their products by automatically installing Windows and Microsoft 365 products into new laptops or offering Microsoft 365 products for a discount or free trials for students. Once these customers are used to using the operating system and products, they will have to eventually pay and most likely be unwilling to switch. The ecosystem that Microsoft built will make it hard for customers to change platforms. Think about it. If you made all your presentations for your company on PowerPoint, are you going to just move to a different presentation app? If all your coworkers use Outlook to send you emails and schedule meetings, are you going to be the only one who doesn’t use it? Also, when it comes time to renew your subscription plan, Microsoft can easily increase the price by $5-20 a year, and again, customers will most likely continue to use their products because they are used to using them and don’t want to go through the hassle of cancellation.
Microsoft also has its hand in the gaming industry, more specifically with them selling their XBOX consoles. Not only do they sell physical products of the gaming systems and games, they also sell digital products, such as the XBOX Game Pass, which is another subscription service many gamers use to play unlimited games for their PC and console. You can see that they can charge anywhere from $5 to $15 dollars a month.
Microsoft’s Azure is another huge segment of revenue for the company. What is Azure? Simply put, Microsoft Azure is a cloud computing service. There are over 600 services that fall under the Azure umbrella, but broadly speaking, it’s a web-based platform on which applications and services can be built, tested, managed, and deployed.
There are hundreds of services available through Azure. Basically any cloud computing product that a business could need can be found on the platform. Some of Azure’s computing services cover networking, storage, web, mobile, analytics, artificial intelligence, machine learning, internet of things, security, developer tools, and media.
So who uses Azure? Because Azure is extremely accessible in nature and massively scalable, it can be and is used by companies or organizations of every size and circumstance, like a startup in a garage to the United States government. Because of it’s innovation and business-critical services, it makes Azure flexible. Users can add new services, up their storage capabilities, and create new applications as they go, without having to worry about whether they have the infrastructure to support any changes. Azure largely eliminates the need for costly hardware like servers and routers and the IT manpower to maintain them, saving companies a lot of money. Many Azure services operate on more of a pay-as-you-go system, and users can get a real-time view of how much they’re spending, making budgeting much easier and more precise.
Now, let’s take a quick look at Microsoft’s financials. It’s pretty incredible to see their top line revenue grow year over year. In 2016, they made 85 billion dollars. In 2017, it went up to 90 billion. In 2018, 110 billion. And in 2019, they made a massive 126 billion dollars.
With all of Microsoft's revenue, they pay investors a dividend each quarter. This dividend is currently 51 cents per quarter and it has been increasing over the last 10+ years. Remember, companies that increase their dividends show investors that they are doing well and give them more confidence in the future. They not only make money through their Surface products, Office products, Azure, Windows, and gaming, they also have revenue coming in from Bing, which is their search engine, and their large acquisitions such as LinkedIn, which is a business and employment platform, GitHub, which is a a source code management platform, and Skype, which is a video chat and internet communications service.
With Microsoft making consistent revenue each year, you can see how Smart Money keeps pushing the stock price higher and higher. Here’s a look at Microsoft in the past 5 years, 1 year, and 3 months. Even with the pullbacks and broad-base selloffs, Microsoft is resilient and retraces every single time. Remember, stock prices are high because there is high demand. Stock prices drop when investors don’t want them and the demand is low. Because we are retail investors, we can’t influence the price of Microsoft. It’s the Smart Money, like banks, hedge funds, mutual funds, and institutions, who can do this because they are the ones with billions and billions of dollars. Our strategy as retail investors is to choose stocks with great fundamentals like Microsoft and to ride the wave up with the Smart Money.
I believe that having their large moat in a variety of services and products and strengthening their subscription business model is an incredible way for Microsoft to continuously keep and grow their customers, which ultimately provides them consistent revenue quarter over quarter and year over year. And also if you haven’t noticed around you, there is a huge shift on how businesses are run now. Because of the pandemic, many businesses are shifting into the digital world online and the demand for these digital products are higher than ever, making Microsoft’s future look even brighter and their stock price to continue to trend upward. Lastly, Microsoft is an amazing candidate to sell covered calls on giving you a potential of making around $3000 of income every month, depending on the size of your account.
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