When Satya Nadella took over as Microsoft's (MSFT 0.11%) CEO in 2014, the tech giant was worth about $300 billion. It tripled in value to become a $1 trillion company in 2019, then doubled its market cap to $2 trillion in 2021. It's worth $2.5 trillion today.
Microsoft could become a $3 trillion company in the near future, but could it double in value and become a $5 trillion one by the end of the decade? Let's review its recent growth trajectory, upcoming catalysts, and valuations to decide.
Image source: Microsoft.
How did Microsoft get to $2.5 trillion?
Microsoft's market value skyrocketed under Satya Nadella for three reasons. First, it expanded its Azure cloud infrastructure platform while converting its desktop-based applications into subscription-based cloud services. Second, it ditched Windows Phone and launched iOS and Android versions of its productivity software.
Lastly, Microsoft continued to expand its ecosystem through its acquisitions of Mojang, LinkedIn, GitHub, Affirmed Networks, Zenimax Media, and Nuance Communications. It also agreed to buy the gaming giant Activision Blizzard last January, but that massive deal still needs to clear a lot of regulatory hurdles.
Between fiscal 2014 and fiscal 2022, which ended last July, Microsoft's total revenue grew at a compound annual growth rate (CAGR) of 11% from $86.8 billion to $198.3 billion. Its earnings per share (EPS) rose at an even higher CAGR of 18%.
Microsoft's cloud-based expansion initially compressed its margins, but economies of scale kicked in as Azure secured its spot as the world's second-largest cloud infrastructure platform after Amazon Web Services (AWS). According to Canalys, Azure held 23% of the global cloud infrastructure market at the end of calendar 2022, compared AWS' 32% share and a 10% share for Alphabet's Google Cloud Platform (GCP).
How could Microsoft get to $5 trillion?
Microsoft's growth over the next few years will depend on the ongoing expansion of its cloud ecosystem, its continued growth on iOS and Android through mobile apps, its ability to transform its Xbox console into a cloud-based gaming service, and the expansion of its "generative AI" services through its investments in ChatGPT.
According to Fortune Business Insights, the cloud computing market could still grow at a CAGR of 20% from 2023 through 2030. If Microsoft merely keeps pace with that growth rate, it could nearly quadruple its annual cloud revenues from fiscal 2023 to fiscal 2030. The expansion of its productivity apps on iOS and Android, which tether mobile users to its cloud-based services, will likely complement that growth.
Microsoft launched its Xbox Cloud Gaming service in 2020, and it reportedly locked in over 13.2 million players at the end of calendar 2021. That represents more than half of the 21.8 million Xbox Series S and X consoles it has sold since late 2020, as well as over half of its 25 million Xbox Game Pass subscribers (as of Jan. 2022).
If Microsoft blends together its Xbox Game Pass and Cloud Gaming services, it could gradually replace its low-margin consoles with a high-margin cloud-based service -- which would enable its subscribers to play their games on any low-end device. That's why Microsoft is keen to add Activision Blizzard to its gaming portfolio -- and why antitrust regulators are closely scrutinizing that deal. Fortune Business Insights believes the nascent cloud gaming market could expand at a whopping CAGR of 47% from 2023 to 2030 -- so this division could eventually become a new growth engine for Microsoft.
Lastly, Microsoft has invested billions of dollars into OpenAI, the creator of the generative AI chatbot ChatGPT and the image generator DALL-E. It has already integrated ChatGPT into its Bing search engine and Azure cloud services, and it uses DALL-E to power its own Bing Image Creator for AI-generated images. Those moves could grant Microsoft a big early mover's advantage in the global generative AI market -- which Reportlinker estimates will grow at a CAGR of 36% from 2023 to 2030.
Microsoft has an easy path toward $5 trillion
With so many irons in the fire, we can conservatively expect Microsoft to grow its revenue and EPS by at a CAGR of 10% from fiscal 2022 to fiscal 2030. At that rate, Microsoft's revenue will more than double from $198 billion in fiscal 2022 to $425 billion in fiscal 2030, while its EPS will more than double from $9.65 to $20.70.
Assuming its valuations hold relatively steady, Microsoft's market cap would double from $2.5 trillion today to $5 billion by the end of the decade. That certainly wouldn't be as impressive as Microsoft's 583% gain over the past seven years, but it would still be a rock-solid return for one of the world's largest tech companies.
