Microsoft: A Fortress in the Age of Tariffs

Cloud, Software, and the Power of Platform Lock-In

Hi all,

This is the 1st of a 10 part series, following my “10 Tariff-Resistant Businesses” article written a week ago.

Over the next 10 weeks, I will be doing a deep dive on these 10 businesses and giving each a rating between 0 to 10, on how attractive each of them are.

First up, Microsoft $MSFT.

Microsoft needs no introduction. It is the 2nd largest stock in the world, only behind Apple, and a large part of millions of lives.

Today, I will run through each segment of their business and break it down.

Revenue Segments

Microsoft has split its revenue into 3 key segments:

1. Productivity and Business Processes (32% of Revenue)

This is Microsoft’s original revenue source, with Office 365 (Enterprise + Personal), LinkedIn and Dynamics making up the sub-segments.

It is extremely high-margin and growing steadily. Despite being around the market for over 2 decades now, Microsoft continues to hold a dominant position.

It remains a staple of businesses around the world, 80% of Fortune 500 companies use Microsoft Office 365 and it controls nearly half of the office productivity software market.

Operating Income in this segment continues to impress, with undoubted pricing power, allowing Microsoft to continue growing profits year on year.

EBIT has grown at 16.7% CAGR over the past 10 years, compared to Revenue that has grown by 11.2%, showing strong operating leverage.

In terms of tariff risk, there is none at all. All services are delivered through the cloud with no physical products.

2. Intelligent Cloud Revenue (45% of Revenue)

This is Microsoft’s core growth engine and cloud juggernaut. It houses Azure and other infrastructure products.

Azure:

• Includes IaaS, PaaS, AI APIs (via OpenAI), Compute, Storage, Networking

• Azure earns revenue through consumption-based pricing. Its main competitors are AWS and Google Cloud.

• This is a segment that is key to Microsoft’s future due to its massive AI potential.

• Today, almost 38% of organisations worldwide use Azure for their cloud services.

Server Products and Cloud Services:

• This includes Windows Server, SQL Server, Visual Studio, GitHub etc…

• The main revenue drivers are licensing, cloud migration services and developer subscriptions.

• It plays a key role in legacy businesses transitioning to the cloud.

Enterprise Services:

• This includes technical support, consulting, and integration services for cloud/on-prem hybrid customers.

Intelligent Cloud EBIT has grown at a 23.3% CAGR far outpacing its revenue growth of 17% in the past 10 years. Again, this shows significant operating leverage in the business.

3. More Personal Computing Revenue (25% of Revenue)

This is Microsoft’s most cyclical and consumer-exposed segment, but also the smallest segment.

It includes the only parts of the business exposed to physical goods.

Windows OEM:

• Windows licenses pre-installed on new PCs

• Revenue Driver: PC shipments from OEMs (HP, Lenovo, Dell)

• This is highly cyclical with flat low single digit growth

Devices (Surface)

• This includes surface laptops, tablets and accessories

• These are direct hardware sales that could be affected by tariffs.

Search and News Advertising

• Includes Bing Ads, Microsoft Start, Edge Browser monetisation

• This is a fully digital revenue source growing at high single digit to double digit rates and has zero tariff risk.

Gaming (Xbox)

• Includes Xbox consoles, Game Pass, first-party games, cloud gaming

• These do include hardware, subscriptions and in game purchases.

• Tariffs may affect this as consoles are physical goods.

Tariff Challenges and Microsoft's Resilience

Trump’s recent imposition of steep tariffs have disrupted supply chains around the world, particularly affecting hardware-dependent businesses.

However, Microsoft’s minimal reliance on physical supply chains and its focus on software and cloud services have insulated it from the worst impacts.

In fact, with Microsoft’s focus on subscriptions, digital-products, and cloud-native services, it is one of the best positioned businesses to ride through the tariff war.

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Thank you for reading!

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