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Microsoft Flexes Cloud Muscle
Additionally, Microsoft has largely transitioned from a traditional perpetual license model to a subscription model. Finally, Microsoft exited the low-growth, low-margin mobile handset business and is driving Gaming to be more cloud-based. These factors have combined to drive a more focused company that offers impressive revenue growth with high and expanding margins.
Azure is the centerpiece of the new Microsoft. It is already an approximately $30 billion business, it grew at a staggering 50% rate in fiscal 2021. Azure also is an excellent launching point for secular trends in AI, business intelligence and Internet of Things, as it continues to launch new services centered around these broad themes.
Microsoft is also shifting its traditional on-premises products to become cloud-based SaaS solutions. Critical applications include LinkedIn, Office 365, and Dynamics 365, with these moves now beyond the halfway point and no longer a financial drag.Lastly, the company is also pushing its gaming business increasingly toward recurring revenues and residing in the cloud. We believe that customers will continue to drive the transition from on-premises to cloud solutions, and revenue growth will remain robust with margins continuing to improve for the next several years.
Microsoft Continues to Impress with All Around Strength and Another Positive Guide; FVE Up to $345
Wide-moat Microsoft continues to benefit from digital transformation efforts at enterprise customers. Azure and commercial related demand was robust by any measure, and gaming and Windows were strong even as supply constraints for PCs and Surface tablets remain challenging. We see a slowdown in remaining performance obligation, or RPO, growth and commercial bookings, two forward-looking metrics, as driven by large Azure deals in the prior year period and not a reflection of deteriorating demand
For the second quarter, revenue growth accelerated by 22% year over year to $45.32 billion. All segments were ahead with more personal computing driving the most upside.Operating margin was 44.7%, compared with 42.7% last year, driven by improved scale, upside to quarterly results, and lower operating expenses generally resulting from COVID-19-related dampening of travel, entertainment, and related expenses. Gross margins were down 50 basis points year over year, with a prior change in depreciable life assumption serving as a headwind, offset by growing Azure margins.
Financial Strength
Microsoft enjoys a position of excellent financial strength arising from its strong balance sheet, growing revenue, and high and expanding margins. As of June 2020, Microsoft had $136.5 billion in cash and equivalents, offset by $63.3 billion in debt, resulting in a net cash position of $73.2 billion, or nearly $10 per share. Gross leverage is at 1.0 times fiscal 20202 EBITDA. Free cash flow margin has averaged 30% over the last three years and the company has generated more than $32 billion in free cash flow in each of the last three years.
Bulls Say
- Public cloud is widely considered to be the future of enterprise computing, and Azure is a leading service that benefits the evolution to first to hybrid environments, and then ultimately to public cloud environments.
- Shift to subscriptions accelerates growth after the initial growth pressure, and the company has passed the margin inflection point now such that margins are increasing again and have returned to pre-Nokia and pre-“cloud” levels.
- Microsoft has monopoly-like positions in various areas (OS, Office) that serve as cash cows to help drive Azure growth.
Company Profile
Microsoft develops and licenses consumer and enterprise software. It is known for its Windows operating systems and Office productivity suite. The company is organized into three equally sized broad segments: productivity and business processes (legacy Microsoft Office, cloud-based Office 365, Exchange, SharePoint, Skype, LinkedIn, Dynamics), intelligence cloud (infrastructure- and platform-as-a-service offerings Azure, Windows Server OS, SQL Server), and more personal computing (Windows Client, Xbox, Bing search, display advertising, and Surface laptops, tablets, and desktops).
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
The AMP Capital team also decides on strategic weights to each manager and allowable tactical deviations. Managers are assessed on such criteria as business structure; experience of the team; their alignment of interest, investment merit, and performance; and capacity and fees. The team is also responsible for portfolio review and rebalancing. Portfolio monitoring is undertaken using FactSet and Cortex risk systems.
Portfolio:
AMP Capital Specialist Property and Infrastructure is a multimanager portfolio designed to bring together a mix of Australian and global managers to produce a diversified portfolio of listed real estate and infrastructure. The strategy removed its last direct property asset in May 2021. The portfolio’s composition of the underlying managers had been fairly stable since its inception in 2014, but an October 2019 strategic asset allocation review spurred the decision to remove exposure to unlisted property from its prior 15% allocation (increasing the global listed infrastructure by 15%). AMP Capital has shown strong conviction and patience with the underlying strategies in the listed space, with listed investments now comprising the total portfolio. Both global listed property and global listed infrastructure are represented by internal AMP Capital managers, with allocations of 32% and 47%, respectively, as at July 2021. Australian listed real estate exposure of 20% is managed by passively in the UBS property index. This vehicle makes a suitable supporting holding, and it managed around AUD 259 million as at 31 July 2021.
People:
AMP Capital’s multimanager team sits within the shop’s Multi-Asset Group. MAG is headed by CIO Anna Shelley, who joined in AMP Capital in July 2021. Duy To was appointed head of public markets in August 2021. Day-to-day management of the strategy lies with Rebecca Liu and Trent Loi, who is also portfolio manager for the International Share strategy. External consultant Willis Towers Watson is used at times to work on specific projects and provide research on existing and potential strategies.
Price:
Analysts find it difficult to analyse expenses since it comes directly from the returns. The fees levied by the share class is under middle quintile. Analysts expect that it would be difficult to generate positive alpha relative to its benchmark index for this fund.
Performance:
AMP Capital Specialist Property and Infrastructure lagged its blended benchmark after fees to June 2021 since its December 2014 inception. The passive Australian listed property strategy (UBS Australian Property Index) has closely closely tracked the S&P/ASX 200 AREIT Index over time. The AMP Capital global property securities portfolio has delivered returns ahead of the FTSE EPRA NAREIT Developed TR AUD Hedged Index over the trailing three and five years to June 2021.
(Source: Factsheet from https://www.ampcapital.com/)
(Source: Factsheet from www.schwabassetmanagement.com) (Source: Morningstar)
About the Fund:
While AMP Capital Specialist Property and Infrastructure’s move to a fully listed real assets portfolio is well received, a period of team instability continues to hinder. This is a multimanager strategy combining Australian and international property and infrastructure managers to build a diversified core portfolio of real assets. The managers are assessed on various criteria such as business structure, team and its alignment, performance track record, and fees and capacity. Its inception date is 01 July, 2014. Total Assets under this fund are 264.9 AUD Million.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
