Microsoft (MSFT +0.14%) recently announced a dividend hike and a new $60 billion share repurchase program. The software giant is a cash cow, and is committed to returning excess cash to shareholders. But what else could it buy? In this Motley Fool Live video segment from The Five recorded on Sept. 15, Motley Fool contributors Jason Hall, Toby Bordelon, and Nicholas Rossolillo discuss four other companies Microsoft could acquire instead of repurchasing its own stock.
Jason Hall: All right, guys, let's kick it off with our lead here. Microsoft announced couple of pretty big things a couple of days ago. Maybe it was yesterday. It was this week, I know that much. Raised the quarterly dividend again, I think it was an 11 percent increase. It's become like clockwork, that dividend, getting a double-digit push with those giant cash flows that are coming. But the board said, we're going to do something else to return capital to shareholders. We're going to buy back $60 billion of Microsoft stock. That got me thinking, as I do. I thought a fun topic is instead of taking $60 billion and buying Microsoft as Microsoft plans to do, let's have a little bit of fun with it. Toby, I'm going ask you to kick us off here. What's a stock that trades for around a 60 billion or so market cap you'd rather buy than Microsoft right now?
Toby Bordelon: Well, I'll add it into this questions, I'll go with the idea of like, what company would I think would work well with Microsoft that's around that market price.
Hall: I like this angle you're taking.
Bordelon: It's how I wanted to pull it. Let's assume I'm in-charge of M&A from Microsoft, what would I do? I'd go with DocuSign (DOCU 0.21%). DocuSign is about a 53-54 billion-dollar market cap, around there. First of all, it's just a great business. I would love to own that business, just flat out. I think it fits really well with Microsoft, what they're doing right now. You can easily see how this integrates into Office 365 and how it extends what they're doing there. See, the brilliant part of this plan too is you got a little cash leftover. You can take your six, seven billion or so. You might even be able to pick up Fiverr (FVRR 0.97%) if you get them on a down day, maybe. You could integrate Fiverr. It's about a seven billion dollar market cap right now. You could maybe integrate that with LinkedIn, and maybe actually realize some of the promise that was supposed to give us way back in the day when they acquired that.
Hall: That'll be a nice little just to take your fiber and by Fiverr. That'll be bolt that on right there. Here's the real question though.
Bordelon: Exactly. I will say, I always go to this exercise. It's mind-boggling to me that you can take what Microsoft is spending on stock buybacks and just come up with companies. Good, really great companies that you would like to own that are less than what they're spending on buying back their shares. That's what we're dealing with in terms of the cash they have here. When you think about that terms, it really makes you see how big this company is.
Hall: It's enormous, it really, really is. You go back 10 years ago and we were all focused on the decline of this business and it's bigger and more profitable and probably better run now than it has ever been. With that said, Nick, you have a bit of a Microsoft competitor here that you want to talk about.
Nicholas Rossolillo: Yeah, I'm going to go with Twilio (TWLO +1.70%). Its closeout today was, up today, so $60.5 billion, just over what [Microsoft] said they'll spend on share buybacks. But still a pretty small business. When you think, like Toby was saying, the epic scale of Microsoft they generated almost that much in free cash flow just in the last year alone. Pretty small company. Twilio is that communications software business that operates behind the scenes, powers all sorts of communications on the web, text, chat, video. Microsoft actually launched their own competing service as Azure Communication Services this time last year. When that happened, they billed it as like use the same tools that Microsoft's Teams users to build your own communications app. That was worrisome for Twilio shareholders, obviously hasn't slowed the company down one bit. Their second quarter, they grew 67 percent year-over-year, expects to grow 50 percent in the third-quarter. It would be a nice little software-based telecom fit for Microsoft, I think to complement what they have going on at Teams.
Hall: Yeah. I think it would be an interesting in that sense. Twilio is a cool business and the addressable market for what they're doing. Even competing against the Microsoft's of the world, I think this is a company that's going to continue to be a winner. They just execute so well, they have great margins. At the end of the last show, Trevor was talking about revenue retention rates and some of those other metrics. They just do so well. I'm going to go with similar way here, but I'm going to talk about Cloud security with CrowdStrike (CRWD +0.57%). This is somewhere in that 55, $58 billion market cap range. I'm not going to beat around the bush guys. This is a nosebleed valuation. Stock trades for about 51 times trailing revenues. That's crazy expensive. I'm not going to pretend that this isn't an expensive stock.
Bordelon: Yeah. But that never scared Microsoft off in the past, Jason.
Hall: No, it hasn't. It sure as heck doesn't scare me either. Whether it's my money and I'm buying a share of this or Microsoft were to acquire this business, here's why want to own it. You think about what what Satya Nadella has done with Microsoft, pivoting it, skating to where the puck is going to be, the Wayne Gretzky analogy there. This is a company, Microsoft that has gotten into the Cloud, and he's such a leader there, and that's where its businesses is going to continue to grow. Even as it continues to be really important and legacy computing continues to be really important in the enterprise, continues to be important in computing infrastructure. It made such a massive pivot. Just being where the data is going and how so much of the world software is being operated with the cloud. Cloud security, guys, is gigantic, and the need, it's almost like a logarithmic growth here. I'm going to do a couple of screen shares just to highlight some things about this business that I think are interesting. I'm just going to go straight from their presentation. This is their slide. They say they are a category-defining Cloud platform with companies like Salesforce (CRM 0.22%), ServiceNow (NOW +2.36%), and Workday (WDAY +0.70%). I think there's a lot of truth to that. You look at some of the metrics that they're putting up, and it's quite impressive. Let's start right here. Seventy percent annualized recurring revenue, year-over-year growth. Their subscription revenue, which is customers that sign up for long term subscriptions, is up 71 percent on a year-over-year basis. 94 percent subscription revenue growth. Great number of customers is up. Number of customers that have four or more modules makes up almost two-thirds of their business. If you look at what's happening with their customer base, I think this is really important. They're growing their customer base 81 percent year-over-year. You think about that 71 percent revenue growth rate, they're growing their customers at a faster rate. You think about the number of modules their customers are subscribing to, those are really positive things. You think about the total addressable market. Company says that by its year fiscal 2025, it says that it will have a total addressable market of $106 billion. This is for a company that did I think a little over a billion dollars in revenue over the trailing 12 months. I've got two more slides here I want to share. Again, talk about land and expand. This is a really important part of its business. You look at these metrics here. This is net revenue retention rate. Here's the best way to think about it. So 124.8 percent last quarter, for every dollar a customer gave them last year, they gave them $1.25 this year. Then you think about this gross retention rate right down here, this is like stickiness and customer churn, so 97.6 percent. In other words, it's only churning about two-and-a-half percent of it's customers. That's really, really, really compelling and talks about the strength that it has and what it does. Then there's this one here. This is the platform strength and the different modules that it has. Almost 30 percent of its customers have six or more modules, more than half have five or more. Customers sign up for it. They stay, they spend more money, they do more stuff with the business. Do you guys see the YChart? Did this come up, one I just click on it? Again, 51 time sales, that's not cheap. I'm not going to pretend that it's cheap. But what does it do with those sales? Here's this revenue rates. So 1.14 billion over the trailing 12 months. It turned 459 million of that into operating cash flow. That is gigantic cash conversion. Even after spending on capital expenditures, $364 million of free cash flow. That is gigantic free cash conversion for a company, by the way, that's growing revenue over 70 percent year-over-year. That's why this is a $60 billion business that I love to buy and love to own. Microsoft could probably do it, not even necessarily have to deal with too many antitrust issues, which we'll talk about more here in a few minutes because we're going to talk about antitrust stuff later in the show.
