Microsoft (MSFT 0.78%) is the second-largest company in the world, with a market cap of $2.1 trillion. It's best known for its software products, such as the Windows operating system and Office 365 suite, which are used by billions of people worldwide.
But it takes operational diversity to build a company of this size. While Microsoft has earned its incredible brand recognition through its consumer-facing products and services, its largest segment by revenue also serves businesses.
That segment is cloud computing, and it's an industry that could be worth over $1.5 trillion annually by 2030. Here's how it's driving growth for Microsoft.
Outpacing the rest of the company
Cloud services have become essential because they enable companies to migrate their operations online, connecting teams across borders. It has even transformed the way people use core Microsoft products like Office 365, which now features powerful collaborative capabilities.
Microsoft's flagship cloud platform is called Azure, and it's used by 95% of Fortune 500 companies for a variety of purposes. Azure offers over 200 products and 40 solutions ranging from data storage to artificial intelligence tools to cybersecurity, and it's the key driver behind Microsoft's Intelligent Cloud business segment.
Cloud revenue is outgrowing the company's revenue overall, picking up the slack from Microsoft's other two core segments.
As a result, the cloud has grown over time to become the most important piece of Microsoft's total business by representing the lion's share of revenue. If the cloud continues to outpace Microsoft's other two business segments, its share of the company's overall revenue will only expand further.
The bigger picture might be even more telling. Given the broader cloud industry is expected to grow at 15.7% annually between now and 2030, the fact that Microsoft's cloud business is crushing even that rate suggests the company is rapidly taking more market share each year.
Microsoft is still innovating for consumers
Cloud computing aside, Microsoft's consumer-facing businesses are still critical, especially in the hardware space, as it's an area in which the company has historically struggled. Microsoft's Surface brand makes tablets and notebooks, and the Xbox gaming console is a global powerhouse. Both are billion-dollar enterprises in their own right.
But Microsoft is attempting to lean into gaming even further through its proposed acquisition of Activision Blizzard for almost $69 billion earlier this year. The deal isn't complete yet, but it could give Microsoft a leg up over its key gaming competitor Sony, which makes the PlayStation console. Activision Blizzard makes some of the most popular gaming titles in the world, including Call of Duty and World of Warcraft.
Over the long run, Microsoft's diverse business makes it a great part of any investment portfolio. It provides exposure to both consumers and the corporate world; plus, financially, the company is a powerhouse. Analysts expect it will generate over $199 billion in revenue for the fiscal 2022 full year ending June 30. And from a profitability standpoint, it could deliver $9.33 in earnings per share, assuming it meets fiscal Q4 estimates.
That places Microsoft stock at a forward price-to-earnings multiple of 30, slightly cheaper than the Nasdaq 100 index, which trades at a multiple of 31 right now. But given the quality of Microsoft as a company, there's an argument it should be trading at a premium, which leaves plenty of room for potential upside, especially over the long term.