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Microsoft Is Hitting Home Runs, With The Metaverse On Deck

By Bradley Guichard – Jan 10, 2022 at 8:00AM

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Mega-caps are propelling markets to all-time highs, and the metaverse could provide Microsoft with another massive revenue stream.

The metaverse could be an $800 billion addressable market by 2024, according to Bloomberg. This is a massive opportunity for any tech company able to gain significant market share, and there's one company with the history and inside track to gobble up a gigantic portion of it.

For those still trying to grasp it, the metaverse is a three-dimensional "world" where people can interact with one another and their environments using augmented reality (AR) and virtual reality (VR) technology. AR and VR technology are often used for gaming, business, or social functions in which the participants are usually represented by avatars.

If this seems like science fiction, remember how we thought about the internet in the 1980s. It was a novelty, and many of us probably scoffed at the idea that it could one day dominate our lives, providing us with commerce, news, entertainment, and social interaction. Now, we can scarcely imagine life without it.

A person wearing a VR headset while touching a virtual globe.

Image source: Getty Images.

A proven track record

Microsoft (MSFT 1.97%) has proved it can successfully develop and monetize new technology. Most recently, its cloud services business, Microsoft Azure, has been an enormous boon for the company. Azure is now the second leading cloud services platform by market share, behind only its Amazon (AMZN 0.01%) competitor, Amazon Web Services.

Microsoft's Intelligent Cloud segment provided $39 billion in revenue in fiscal year 2019. By fiscal 2021, this figure had risen to over $60 billion. Operating income from the segment has nearly doubled from $14 billion in fiscal 2019 to over $26 billion in fiscal 2021.

Chart of Microsoft's Intelligent Cloud segment revenue, operating profit, and YOY growth rates.

Data source: Microsoft. Chart by author. 

Better still, as shown above, the growth rates have accelerated since 2019. This bodes well for the evolution of Microsoft's various platforms into the metaverse. 

And now, the metaverse

The pandemic has undoubtedly accelerated the work-from-home (WFH) trend, and the repercussions will last long after the pandemic is in the rearview mirror. According to a survey by public accounting firm PwC, 83% of employers say that remote work has been a success. While some employers plan to return to the office full time, many are embracing a hybrid model or full-time WFH.

Maintaining company culture and effectively collaborating are considerable challenges when working at a distance, and Microsoft Teams is looking to bridge this gap. The new Mesh for Teams software allows workers to collaborate virtually in the metaverse using customized avatars. Virtual meetings, new-hire orientations, presentations, and other events can be held virtually using this immersive technology.

Gaming is another area of opportunity for Microsoft in the metaverse. According to CEO Satya Nadella, several games that are now two-dimensional are being reimagined for the virtual world. Gaming provided over $15 billion in revenue in fiscal 2021, and this could explode in the future with successful metaverse applications. 

New technological advancements can be a game-changer for industry and entertainment, and Microsoft is poised to capitalize.  

Firing on all cylinders

Microsoft's core businesses are doing excellently nearly across the board as well. For the fiscal year ended June 30, 2021, revenue rose to $168 billion from $143 billion in the prior year on the back of solid gains in server and office products and cloud services, gaming, and other revenue streams. These gains have led to increased operating and net margins, along with higher margins as calculated on the basis of earnings before interest, taxes, depreciation, and amortization (EBITDA), as shown below.

MSFT Operating Margin (TTM) Chart

MSFT operating margin (TTM), Data by YCharts. TTM = trailing 12 months.

In addition, Microsoft has a very impressive balance sheet with over $130 billion in cash and short-term investments on hand as of the latest report. This amounts to 7.5% of the current market cap. These results prove that the company's offerings are highly scalable and that it is being managed incredibly well.

Is Microsoft a buy?

Microsoft currently trades at a forward enterprise-value-to-EBITDA ratio just north of 25. This is higher than it has traded in recent history, but investors should not be discouraged. Microsoft is hitting all the right notes and growing fast.

The company's cloud business is booming, and the metaverse offers fertile ground for new revenue sources in the very near future. Management has given the company increasing margins and large cash reserves. For long-term investors, Microsoft is a company to buy for the current results and hold for future opportunities. 

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bradley Guichard owns Amazon and Microsoft. The Motley Fool owns and recommends Amazon and Microsoft. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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