Why Microsoft Has The Widest MOAT Of All

It’s an arduous task for companies to try and outcompete their rivals in today’s cutthroat market environment.

However, by reinforcing and better understanding their economic moats, firms can gain the upper hand in this neverending struggle.

Whether through pricing power, customer loyalty, or extracting legal protections from government agencies, maintaining these advantages is a surefire way for businesses to dominate the field of play.

Indeed, when it comes to leveraging an edge against industry contenders, one company, Microsoft, is a veritable past master. In fact, the Redmond, Washington-headquartered multinational corporation was so successful in the 1990s that Bill Clinton ordered the United States Department of Justice to break up the firm because of its vast monopolistic powers.

Ironically, MSFT has only gotten stronger since that action, with the company now ranking as the second largest entry on the Nasdaq-100 list of businesses.

But what is it that makes Microsoft’s moat so impenetrable? And why aren’t other tech outfits doing the same?

A Diverse Portfolio With Sector-Busting Margins

Microsoft is one of the most well-established IT companies in the world. The enterprise has built up a wealth of knowledge from its long-time presence in the personal computer business, and enjoys a brand recognition that other firms can only envy.

Indeed, the operation has consolidated its presence in many key verticals. For instance, Microsoft Windows accounts for over 70% of the global desktop, tablet, and console operating system market, with its nearest challenger, Apple, holding just 17% across its macOS and iOS alternatives.

Crucially, the company has transitioned to a subscription model for its flagship Microsoft 365 software. This means that anyone wanting to use its wildly popular suite of apps – including Word, PowerPoint, and Excel – will be tied into the firm’s ecosystem for many years.

In fact, this is an example of a moat in and of itself. Repeated customer engagement with Microsoft’s product universe generates revenue from the initial sale of services, which then lets MSFT upsell and cross-sell other ones on top of that too. A scenario such as this is increasingly seen as the mother lode within the industry, guaranteeing both continued and increasingly lucrative cash flows over the long term.

But it gets better. Microsoft’s assets can be integrated into its other offerings in several ways, forming a kind of “moat within a moat.” Thus, while MSFT profits from widening its subscription base for its Office product, for example, it can persuasively promote the advantages of its Windows and Azure solutions to existing customers as well. This flywheel effect is enormously powerful and has helped compound the company’s business efforts for decades.

Furthermore, Microsoft’s partial acquisition and collaboration with OpenAI will see ChatGPT bring artificial intelligence features to Word, Outlook, Bing, and PowerPoint.

Last but not least, the margins Microsoft’s making right now also put its peers to shame. The firm sports a massive 48.0% trailing twelve-month EBITDA fraction, which, compared to Amazon’s 10.5% or Apple’s 32.2%, demonstrates the company’s proficiency at posting meaningful bottom-line returns.

Why Can’t MSFT’s Opponents Keep Up?

It seems a bold assertion to claim that Microsoft has the widest moat. This is especially true when you consider that many Silicon Valley start-ups have taken precious market share from the company since the beginning of the millennium.

And yet, even a cursory glance at Apple, Amazon, and Alphabet’s latest quarterly earnings reports appears to bear this out. Google – once hailed as the king of internet advertising revenue – saw its ad sales fall for only the second time in its history in February, while Amazon’s cloud business, its most profitable segment, witnessed a year-on-year net sales growth slump from 40% in Q4 2021 to just 20% for the equivalent quarter this year.

Things weren’t much better for Apple, either. Revenue for the electronics manufacturer missed Wall Street’s consensus target by $4.5 billion, dropping 5% to $117 billion.

But despite reaching a significant milestone of 2 billion active devices – and bringing in an unprecedented $20.8 billion in its Services wing – some analysts are still bearish on the firm’s prospects. The lengthening replacement cycle for its iPhone product is causing the company headaches, while the supply chain issues that have beset the firm since before the outbreak of COVID-19 are not going away anytime soon.

Interestingly, the man credited with inventing the term moat, Warren Buffett, cites Apple as an example of a business with the deepest moats. However, some of these – such as its loyal customer base and high switching costs – may be tested over the remainder of 2023.

What Does The Future Hold For Microsoft?

In addition to its excellent business moats, the macroeconomic situation tends to favor MSFT at the moment.

For instance, if aggressively pursued, the Federal Reserve’s anti-inflationary measures will bring about substantial share price appreciation for the company. Meanwhile, the 2% growth the firm registered to its top line – though not huge – is impressive given the average US consumer was spending 0.2% less at the end of last year.

Most importantly, perhaps, Microsoft hasn’t stepped back from its ambitious expansionist plans. Indeed, in addition to its ChatGPT play mentioned earlier, the company is going forward on its Activision-Blizzard buyout. Should this come to fruition, it would no doubt deliver much-needed synergies for its Xbox content and services business, which was down 12% in the second quarter of fiscal 2023.

Microsoft Economic Moat: Conclusion

With the inclusion of OpenAI’s revolutionary machine learning technology into its roster of applications, Microsoft has just added another moat to its economic defenses.
Given that it had plenty to start with already, it’s hard to see how its flailing rivals can hope to compete with the corporation on an even footing from here on out.
That should be good news to MSFT investors, who, on the back of a torrid year gone by, can expect better times in the coming months.

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