Wednesday, 8 April 2020

Microsoft - Portfolio Addition

Microsoft is one of the largest companies in the world with a current market cap. of over $1 trillion. It was founded in 1975 by Bill Gates and Paul Allen and went public with its IPO in 1986. It is probably best known for its software products Windows, Office/Microsoft 365 and also gaming console Xbox.

Obviously the early success was down to the dominance of their Windows operating system but more recently the focus has been on building cloud computing systems via Azure which will involve a lot of capital expenditure - over $15bn in the past year. This level of spending cannot be matched by many others - Amazon and Google are the main competitors - which should give the company a big advantage or 'moat' in the future. 

According to the most recent Q2 results, Cloud revenues increased by 27% to $11.9bn and generating profits of $4.5bn. It will be interesting to see how Covid-19 has impacted revenues in the coming weeks.

I think the shares continue to be attractive for long term growth however what has prompted me to add this to my portfolio is their strong commitment to reducing carbon emissions and tackling climate change. When the big global players like Microsoft start to take this issue seriously, it will have a huge knock-on effect so I appreciate what they are trying to achieve and want to support such companies.

Climate & Environment

I placed MSFT on my watch list in January following the announcement that it was planning to become a carbon negative company by 2030 (10 years ahead of Amazon) and would actually go further and by 2050 would remove all the carbon it has produced since 1975.

All data centres, buildings and campuses will be powered by 100% renewable energy by 2025. All vehicles will be electric by 2030 and over the next decade they will reduce Scope 3 emissions by over 50% via the introduction of an internal carbon tax and incentivise all suppliers to reduce their own emissions.

They have set up a new Climate Innovation fund to invest $1bn over the next four years into new technologies to tackle the climate problem.

The Carbon Reduction article posted on Brad Smith's blog is well worth a read as it provides an excellent summary of the historical context of the climate issues - economic growth, CO2 emissions and rising temperatures - as well as the solutions required on a global scale and the steps required to take responsibility.

"The scientific consensus is clear. The world confronts an urgent carbon problem. The carbon in our atmosphere has created a blanket of gas that traps heat and is changing the world’s climate. Already, the planet’s temperature has risen by 1 degree Celsius. If we don’t curb emissions and temperatures continue to climb, science tells us that the results will be catastrophic".

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However it's not yet clear how the company will address the criticism for their relationship with the big oil companies. I don't see how they can maintain credibility with the new climate policy whilst continuing to supply the likes of Exxon, Shell and BP with AI tools for pinpointing better drilling locations and speeding up refinery production....something has to give!

(Since posting, this Guardian article provides an interesting overview)

Microsoft is one of just 180 global companies (out of 8,400 assessed) to achieve the 2019 'A' list on climate change from CDP.

The share price has seen a good run over the past year rising from $120 last April to $190 in February. Obviously it has retreated over the past month due to Covid-19 but appears to be bouncing back just as swiftly. The shares were purchased in my ISA at the price of $164.

3 Yr Comparison v S&P 100 Index
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"Reducing carbon is where the world needs to go, and we recognize that it’s what our customers and employees are asking us to pursue. This is a bold bet — a moonshot — for Microsoft. And it will need to become a moonshot for the world".

"It won’t be easy for Microsoft to become carbon negative by 2030. But we believe it’s the right goal. And with the right commitment, it’s an achievable goal. We will need to continue to learn and adapt, both separately and even more importantly in close collaboration with others around the world. We believe we launch this new initiative today with a well-developed plan and a clear line of sight, but we have problems to solve and technologies that need to be invented. It’s time to get to work".

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation. Individual shares usually carry more risk than collective investments such as index funds - always DYOR!


  1. Interesting write-up and I like seeing the different angles you're coming at the problem from. :)

    Where I don't really agree is that the company shouldn't work with drilling companies or anyone else who wants to use their software in a legal way. Perhaps I need to think about this some more, but my feeling is I don't want my companies to micro-police to that level. (I'd even say the same for banks).

    On the other hand I'd love for the world to introduce an effective global economy-wide carbon tax that gradually prices fossil fuels out of existence. So we want to go in the same direction.

    (Also long MSFT)

    1. Thanks TI.

      I don't know the details of these bespoke contracts with the big oil companies, merely what's in the public domain. However when Microsoft make real-time data exclusively available to the likes of Exxon for a fee so they can make faster and better decisions on drilling, then I think Microsoft employees and investors are right to flag this up and point to the new climate strategy.

      Its early days and I guess much will be depending on the outcome of the US elections later this year. Another four years of Trump and I really do fear for the future!

    2. Always enjoy reading this blog. However, yes the contracts Microsoft have with the oil and gas industry do appear quite extensive:

    3. Thanks for the link.

      I really don't have a problem with the oil companies like Chevron making use of the Azure cloud facility on the same basis as everyone else. But what is not clear is whether there are exclusive arrangements.

      Hopefully this can be clarified as the new strategy become embedded.