Microsoft (MSFT 0.64%) has turned out to be a terrific investment over the past five years. Shares of the tech giant have comfortably outperformed the broader market thanks to the company's solid revenue and earnings growth.
Microsoft has come a long way from selling Windows operating systems. It is now a cloud computing giant and is pursuing lucrative opportunities in other fast-growing industries.
However, the next five years could turn out to be more rewarding for Microsoft investors, as the company is sitting on some exciting tailwinds that could help it grow at a faster pace. Let's look at a few trends and markets that could shape Microsoft in the next five years and supercharge its growth.
NASDAQ: MSFT
Key Data Points
A video game giant in the making
Microsoft makes the popular Xbox gaming console, and it appears that the latest generation of its gaming consoles is a big hit. The popularity of the Xbox Series X and S consoles reportedly led to a 17.7% increase in Microsoft's gaming revenue in 2021 to $16.3 billion, according to Daniel Ahmad, a senior video game industry analyst at research firm Niko Partners.
Ahmad points out that this was the gaming division's best year, driven by an increase in sales of both Xbox hardware and content and services. More specifically, Xbox hardware revenue was up an estimated 63.3% during the year thanks to the robust demand for its consoles. And Microsoft's console sales are expected to head higher in the coming years.
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Analysts expect the Xbox Series X console to hit annual shipments of 37 million units in 2024, which would be a huge increase over last year's estimated shipments of 12 million units. According to third-party estimates, the lifetime sales of the latest Xbox consoles, which were launched in November 2021, had hit 12 million units by January this year.
The Xbox Series X and S are Microsoft's fastest-selling consoles ever despite supply chain constraints. This puts the company's latest consoles on track to beat the Xbox 360's lifetime shipments of 85 million units. So Microsoft's gaming hardware sales are likely to keep heading higher -- but this is just one side of the story.
Microsoft has been betting big on video gaming content and services. The company acquired ZeniMax, the parent company of popular gaming studio Bethesda, for $7.5 billion in March last year, and got access to popular game titles such as Doom, Elder Scrolls, Fallout, and Wolfenstein, among others. And earlier this year, Microsoft doubled down on video games with the $68.7 billion acquisition of Activision Blizzard.
Microsoft intends to acquire Activision to accelerate the growth of its gaming segment across multiple devices, such as PCs (personal computers), consoles, mobile, and the cloud. It will gain access to popular titles such as Call of Duty, World of Warcraft, Candy Crush, Overwatch, and others once completed.
With these moves, Microsoft will be in a stronger position to tap into the video gaming market, which is expected to hit $314 billion in revenue by 2027.
The cloud business will get bigger
Microsoft's cloud business is its biggest source of revenue, accounting for 35% of the company's top line in the second quarter of fiscal 2022. This business is enjoying solid growth, as Microsoft reported a 25% year-over-year increase in the segment's revenue last quarter.
Such impressive growth isn't surprising, as Microsoft is in a solid position to take advantage of the global cloud infrastructure market's growth. That's because Microsoft is the second-largest public cloud service provider globally, with Gartner putting its market share at 19.7% in 2020. It is worth noting that Microsoft gained 2.3 percentage points of market share during 2020, eating into market leader Amazon's share.
Though the market share numbers for 2021 aren't out yet, it wouldn't be surprising to see Microsoft bolstering its position in the cloud computing market given last quarter's growth. What's more, Microsoft's cloud computing revenue was up 28% in the final six months of 2021 to $35.3 billion.
This also means that Microsoft's cloud computing business is growing at a faster pace than the overall industry. The global cloud computing market is expected to grow at an annual rate of 15% over the next decade, hitting nearly $2 trillion in revenue. So Microsoft's cloud business is built for long-term growth thanks to the company's solid position in this space and the lucrative end-market opportunity.
Microsoft investors can expect more upside
Microsoft's earnings have grown at an annual rate of 18% over the past five years. Looking ahead, analysts expect the company to clock an annual earnings growth rate of 17% for the next five years. However, the company could easily clock a faster pace of growth as its video gaming business gets bigger and it gains more share in the cloud.
At the same time, Microsoft has started taking advantage of emerging tech trends such as the metaverse. The company's net income increased 21% year-over-year in the previous quarter, and the tailwinds discussed here should help it sustain that figure over the next five years. So if Microsoft's earnings grow at an annual pace of 20% for the next five years, its earnings per share would increase to $20 at the end of the period (from last year's earnings of $8.05 per share).
The stock is now trading at 30 times earnings, so a similar multiple in five years would translate into a stock price of $600. So Microsoft stock could more than double from its closing price on Feb. 22 over the next five years. This makes the stock a solid bet right now, as it is trading at a discount to its five-year average earnings multiple of 37, giving investors a nice entry point to take advantage of the multiple tailwinds that could drive the company's growth.
