Business Description of Microsoft Corporation

        Microsoft Corporation is one of the biggest multinational technology companies operating around the globe. It is an American multinational technology company and the headquarters of Microsoft Corporation is situated in Washington, United States. Microsoft Corporation is a public limited company and shares of the company are created at NASDAQ. Microsoft Corporation is responsible for operating in different industries related to Information Technology and some of these industries are computer software, computer hardware, consumer electronics, cloud computing, social networking service, video games, internet, and corporate venture capital. Microsoft Corporation was incorporated approximately 44 years ago on April 4th, 1975 in New Mexico, United States. Founder of Microsoft Corporation is Bill Gates and Paul Allen. Company is responsible for serving customers worldwide.

        Company has employed more than 135,000 employees as of annual report 2018. Company was successfully able to generate revenue of approximately 110 billion US dollars in 2018. Net income of Microsoft Corporation at the end of 2018 was approximately 16 billion US dollars. Total Assets of the company according to the 2018 annual reports of the company are equal to approximately 259 billion US dollars. Total equity of the company according to the 2018 annual report of the company is equal to approximately 83 billion US dollars. These amounts clearly suggest the size of the company. Microsoft is ranked at 30th number in the 2018 rankings of fortune 500 companies in United States. This list of companies provides the top five hundred and largest companies of United States by total revenue.

Products of Microsoft Corporation

        Company is responsible for providing different services to customers and offering different Information Technology related products at global level. Some of the most prominent and significant products offered by Microsoft Corporation are Windows, Office Package, service, Visual Studio, Skype, dynamics, Xbox, surface, mobile, and other related software’s. All these products manufactured by Microsoft Corporation are available worldwide and customers around the globe are using these products. There are also different services being provided by Microsoft Corporation to different customers around the globe. Some of these services include LinkedIn, Office 365 related service, onedrive, outlook.com, windows store providing platform to customers for purchasing different types of software’s and games, Windows update, Xbox live and other related significant services.

Competitor of Microsoft Corporation

        Microsoft Corporation is one of the biggest companies at global level in information technology industry. As far as primary competitors of Microsoft Corporation are concerned, companies like Apple Corporation cover Google Corporation, Oracle, IBM, SAP and other related companies are able to significantly compete with Microsoft Corporation at global level. These brands are prominent brands in information technology industry and are considered to be most prominent Technology oriented companies (SEGAL 2018).

Strategy of Microsoft Corporation

        Microsoft Corporation has different Strategies for different products and services. One of the most significant and common strategy of Microsoft Corporation is promotion of Technology intensity around the globe which not only includes Technology oriented services but Technology oriented products as well. Reports published by the management of Microsoft leadership suggest that Microsoft Corporation is closely associated with positively contributing towards ecosystem and other issues related to Corporate Social Responsibility in order to become a reputed organization around the globe. Another significant strategy of Microsoft Corporation is to focus on expenditures related to research and development. Microsoft Corporation is using more than 9 billion US dollars on annual basis for efforts related to research and development. These efforts are helping the management and leadership of Microsoft Corporation to introduce new software’s and Technology oriented services for business community specifically around the globe (Dudovskiy 2019).

        Microsoft Corporation has a significant and tremendous competitive advantage as compared to the competitors when it comes to cloud services. The cloud services of Microsoft Corporation are considered to be best among the globe. Microsoft Office 365 is software as a service and is one of the best cloud related service around the globe as compared to the competitors of Microsoft Corporation (https://seekingalpha.com/article/4109614-microsoft-best-competitive-advantage-cloud).

Revenues of Microsoft Corporation

        As far as total revenue is concerned, Microsoft Corporation was ranked as 30th largest Organization in United States by total revenue among the list of fortune 500 companies in 2018. Microsoft Corporation was able to generate total revenue of approximately 110 billion US dollars in 2018 according to the 2018 annual report of the company. The following graphical representation provides the trend of total revenue generated by Microsoft incorporation in United States, other countries and total revenue during 2016, 2017 and 2018.

The above graphical representation clearly suggests that revenue of Microsoft Corporation in United States as well as in other countries has been experiencing increasing trend from 2016 till 2018. The this clearly suggest that the overall revenue generated by Microsoft Corporation around the globe has experienced increasing trend from the last 3 years according to the graphical representation and data collected from the annual reports of the company. It can be clearly seen that the amount of total revenue generated by Microsoft Corporation from United States during 2016 till 2018 has been greater than the revenue generated from other countries during these three years. Data representation suggest that domestic market of United States is Greater than the Global market of the Microsoft Corporation as per as total revenue is concerned. Company is able to extract more revenue from United States as compared to the rest of the world.

Investment of Microsoft Corporation

Microsoft Corporation has recently crossed Apple Corporation as the world's most valuable company in the industry of Technology. Microsoft investment strategy is mostly dependent upon the research and development level implemented by the organization. Microsoft Corporation is responsible for investing approximately 9 billion US dollars every year on research and development. This helps the management to manufacture and introduce different types of software’s and Technology which is then used by different organizations around the globe. Stock price of the Microsoft has experienced consistent performance from the last 12 years while the stock price of Apple increased by more than 5000% (Ades 2019).

Market Risk Quantitative and Qualitative of Microsoft Corporation

Interest Rate Risk of Microsoft Corporation

Microsoft Corporation has been below average as far as dividend yield is concerned. Dividend yield of Microsoft Corporation has been below average as compared to the yield on long term government securities in United States. This is a major concern for most of the investors in stock market. Stock performance of the company has also been pretty consistent for Microsoft Corporation during the last three years. This clearly suggests that the shares of Microsoft Corporation are not beneficial for short term investment but they can be beneficial for comparatively long term investment. Investment securities having less amount of share price volatility are beneficial for long time investment while investment securities having significant amount of volatility are suitable for short term investment strategies. Microsoft Corporation shares are comparatively less risky for the investors in market as compared to the shares of competitors like Apple Corporation, Google Corporation and related giant companies in information technology industry (seekingalpha 2016).

Microsoft Corporation is significantly exposed to the risk of interest rate because Microsoft Corporation has carried out significant amount of investment in debt instruments. That is why, interest rate risk associated with Microsoft Corporation is very high (seekingalpha 2016).

Foreign Exchange Risk of Microsoft Corporation

As far as foreign exchange risk is concerned, total revenue analysis of Microsoft Corporation suggested that approximately 50% of the total revenue of Microsoft Corporation comes United States and the remaining 50% is generated from other countries around the globe. This clearly suggests that the revenue and expenses of Microsoft Corporation are significantly associated with exchange rate fluctuation and volatility. It is important for the leadership and management of Microsoft Corporation to mitigate the risk associated with exchange rate as approximately 50% of the Microsoft Corporation customers are outside United States.

Investment Risk of Microsoft Corporation

As far as equity and debt financing of Microsoft Corporation is concerned, company management as used equity financing sources significantly as compared to debt financing sources. One of the most significant factors behind using equity financing significantly as compared to debt financing is the positive image of the company in market and good reputation of Microsoft Corporation in market. Analysis of debt financing clearly suggest that it is following increasing trend as the management is continuously enhancing the usage of debt financing during the last 4 years.

Valuation of Microsoft Corporation

Weigh Average Cost of Capital

In order to calculate the weighted average cost of capital for the Microsoft Corporation, portion of that as compared to assets is 55% while portion of equity as compared to the assets is 45%. The results of weighted average cost of capital suggest that the weighted average cost of capital for Microsoft incorporation will be 15.2 7% according to the growth rate of 7.9 % on annual basis. The results of the discounted cash flow calculation suggest that the calculated share price for Microsoft Corporation is $76.70 while the current share price of Microsoft Corporation in market is $119.70. Is difference between the calculated share price for Microsoft Corporation and current market price of share, it can be concluded that the shares of Microsoft Corporation being traded in stock market are overvalued because the calculation value of the share price in books is less than the market price of the share being traded in the market. Net present value for the future cash flows for Microsoft Corporation is positive according to the calculation results of discounted cash flows. It can be concluded that discounted cash flows are in favor of future performance of Microsoft Corporation. It is important for any business or project to have positive net present value for the discounted cash flows in order to consider that specific project or business feasible for any kind of project related investment or business related investment.

        The above table provides comparative performance of stock price of Microsoft Corporation with S&P 500 and NASDAQ. The trend of the accumulated total return clearly suggests that performance of Microsoft Corporation from share price prospective has been better as compared to S&P 500 and NASDAQ. Microsoft Corporation as well as S&P 500 and NASDAQ has followed increasing trend in relation to cumulative total return but the trend followed by the Microsoft Corporation has been highest as compared to the S&P 500 and NASDAQ.

        The above graph shows the comparison of five year cumulative total return for Microsoft Corporation, Nasdaq and S&P 500. The graphical trend clearly suggest that Microsoft Corporation, Nasdaq and S&P 500 has been following increasing trend from 2013 till 2018 as far as total return is concerned in stock market. This is a positive sign for the Microsoft Corporation because it is moving with flow of the market and it will improve interest of investors in Microsoft Corporation with the passage of time.

Terminal Value of Microsoft Corporation

According to the predicted calculations by FCFE and FCFF, credited net income of Microsoft Corporation will experience increasing trend from 2019 till 2023. As far as the actual net income of Microsoft Corporation is concerned, company experienced fluctuation from 2014-2018.

Sensitivity Analysis:

    Sensitivity analysis has been applied on the financial statements of Microsoft Corporation from 2014 till 2018 in order to formulate the predicted values for financial statement of Microsoft Corporation related to 2019. Results of these predicted financial statements were further utilized in order to calculate discounted cash flows for the Microsoft Corporation.

References  of Microsoft Corporation

Ades, Jack. 2019. Microsoft’s Investment Strategy: Are they Making Too Many Bets? Accessed 04 09, 2019. https://www.akaes.com/blog/microsofts-invenstment-strategy-are-they-making-too-many-bets/.

Dudovskiy, John. 2019. Microsoft Business Strategy and Competitive Advantage. Accessed 04 09, 2019. https://research-methodology.net/microsoft-business-strategy-and-competitive-advantage/.

seekingalpha. 2016. Microsoft: Risk Ahead. Accessed 04 09, 2019. https://seekingalpha.com/article/4033482-microsoft-risk-ahead.

SEGAL, TROY. 2018. Who are Microsoft's (MSFT) main competitors? 01 08. Accessed 04 09, 2019. https://www.investopedia.com/ask/answers/120314/who-are-microsofts-msft-main-competitors.asp.