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Tracking Microsoft's moves beyond software

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Watch for Microsoft's prowess in development tools, cloud computing, and Xbox, says Kim Forrest, founder and CIO of Bokeh Capital Partners. Microsoft was just named Yahoo! Finance's Company of the Year.

Video Transcript


- OK, so there's this company-- you might have heard of them-- Microsoft. They are the Yahoo Finance company of the year, truly really doing remarkable things with Satya Nadella at the helm. We want to talk about what investors should prepare for when it comes to Microsoft going forward. And to help us break down the performance we've witnessed and one of the reasons why they are the company of the year here at Yahoo Finance, we've invited in Kim Forrest from Bokeh Capital Partners, the founder and chief investment officer.

It's good to have you here. When-- when so many of us-- I guess it's a generational thing. When we think Microsoft, some of us think of, you know, Windows 97 or 98. Then some of us think about, well, some of the inability to get the stock to move, and then there's the cloud with Azure. What, going forward, should the next generation of Microsoft investors take into consideration?

KIM FORREST: Well, I think it's twofold. Firstly, I think Azure still has a lot of room to run. What I think people really overlook is the amount of custom software that businesses have put into their everyday lives. And Microsoft has always been a great maker of development tools, and people use them to make these processes that make their business is run.

And not everybody has stepped up to Azure, so I believe there's still some room to run with Microsoft converting these custom applications over to Azure. So there's that, and there's also the softer side of Microsoft, which is Xbox. And it's doing really well even, you know, post, I would say, post-COVID lockdown.

- Kim, this is Emily here. I wanted to ask a little bit more about Microsoft Azure since that is what so many investors have been focused on. And we saw in Microsoft's latest quarter that sales of Azure and other cloud services were up 50%. So just a little bit below the 51% rate we saw in the prior quarter. Can this kind of growth be sustained?

KIM FORREST: I'm anticipating that that growth will tail off at some point. I mean, that's a really aggressive number, right? But remember, if a business is moving to the cloud, it's not just, you know, the development part of it. It is storage and all that kind of big data that goes along with it. So I think this is a growth engine for the future. They were up way higher a couple years ago, but it's the law of large numbers. So we expect the percentages to go down but the numbers still to climb.

- Microsoft is making a move to get people, especially their business contracts, to sign annual contracts for Microsoft Office, or you face a higher fee to go by monthly. Is this going to have any kind of waves? Or is this really nothing to pay too much attention to?

KIM FORREST: I think it's nothing to pay much attention to. They'll get a nice bump. What I think they're trying to do is take out administrative costs. And as somebody who's a shareholder, I think that's a good idea.

- Kim, also wanted to ask, of course, we do have Microsoft in the $2 trillion club. When do you see it hitting $3 trillion? And what's that catalyst going to be?

KIM FORREST: I think it's more of the same, right? What they do, they do really well, or actually, I should say what they do, they do well enough, right? Because they make sure that businesses have tools to do their business on, but they're probably not, like, the thing that makes you fall in love with technology.

You know, if you look at Slack, Slack came on like gangbusters, and people who used it loved it. But, ultimately, it looks like Microsoft Teams is winning out, and that's because it's free. So that's Microsoft's MO, good tools at relatively great prices. And when that $3 trillion mark hits, I don't know. I'm not good at forecasting that, but we'll just say between now and three years, maybe three years.

- That's a good forecast, but can we get back to Xbox? I haven't played a video game-- you should know-- since Donkey Kong, and I'm talking the first iteration of Donkey Kong. There are people who say maybe they should get rid of the Xbox side of the business. What would you say to those people?

KIM FORREST: Well, a lot of people wanted them to break up into operating system and business applications too, and that was probably not a great idea either. So what I think Xbox does is it allows them to experiment in some of the farther-out-there technologies and then roll them into the business applications. It's almost like a proving ground of technology. So I say let them keep it. It's incrementally beneficial to them, and it certainly is a good testbed for the next-generation technology.

- And Kim, going back to what Adam was really discussing about that report from CNBC with Microsoft Office prices potentially going up for business clients unless they switch to that annual subscription here, when we think about Microsoft versus some of the other competition, do you see other players having that same kind of pricing power potentially in the software space?

KIM FORREST: It depends on what they do. If it's something like CRM, Salesforce, maybe. It depends on how much you're running your business off of it, what is the pain point to stay, and what's the pain point to leave. And I don't think anybody-- well, maybe-- maybe one of you is old enough to remember this, whenever we had different, like, spreadsheet programs and somebody would send you a Word Perfect thing.

- Yeah.

KIM FORREST: And you'd have to translate it. It's horrible. It doesn't work. So as long as they're not too egregious about their price increases, companies will stay there because it's just too expensive to move off of it.

- Those were back in the day of Acer computers and Commodore 64s. I think at that point, we're going to call it a wrap, but I want to give you last word. As we look forward to the next three years, I'm going to use that metric because of, you know, the question we had about a $3 trillion market cap.


- What do you think are the next big-- the next big step for them? Is it to pick up the pace of growth in Azure? Or is it going to be something they're working on that hasn't gotten much attention?

KIM FORREST: I'm going to say they're probably in stealth mode for some things. But for the just daily grind, I really see them just continuing to perform well. Their switch away from what Steve Ballmer was doing there is trying to make them the center of the world is-- is not going to ever work for them. And they are playing well with others, other hardware. And they are owning the internet first, mobile first, and it's still working for them.

So I think a little stealth, maybe something exciting coming in, I don't know. Maybe some kind of virtual-- a better version of Zoom maybe or Skype, I could see that. But I think just doing what they're doing is sufficient for growth at this point.

- We appreciate your being here, and all the best to those of you who are in Pittsburgh. We want to let you know that Kim Forrest is Bokeh Capital Partners' founder and chief investment officer.