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Microsoft Corporation (MSFT): Trump’s Trade War Could End Badly

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Despite bygones, tech leaders and president elect Trump struck a friendly chord at this past Wednesday’s Tech Summit held at the Trump Tower in New York. However, gleaning potential policies from the topics discussed (and Trump’s campaign rhetoric) could spell trouble for several of the Tech Summit attendees, Microsoft Corporation (NASDAQ:MSFT) in particular.

This article provides a brief review of Microsoft’s evolving business, several valuation metrics worth considering, and an overview of the potential impacts (positive and negative) of new policies that may come out of the Trump Administration such as those that would artificially create more US tech jobs, lower corporate tax rates, pressure interest rates higher, allow overseas cash repatriation, and utilize punitive tariffs with international trading partners.

Microsoft Corporation (NASDAQ:MSFT), Microsoft corporate offices, people, sign, building, logo

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Overview

Microsoft’s business consists of three segments: Productivity and Business Processes (consists of Office and Dynamics), Intelligent Cloud (consists of public, private and hybrid server products and cloud services, includes Azure), and More Personal Computing (consists of Windows, devices, gaming, search advertising, Bing and eventually LinkedIn). And for reference, the following charts show the revenue and operating margin breakdown and growth trajectory of each segment.

More Personal Computing is the biggest in terms of revenues, but has lower margins and is therefore the laggard in terms of operating income. And with regards to revenue growth, More Personal Computing (-1%) is also the laggard versus the other segments (+8% and +10%) on a year-over-year basis as shown in the following table.

With regards to Cloud, Microsoft seems to be the number two player (behind Amazon Web Services) in an extremely competitive space. Notwithstanding any mistakes, Cloud should provide Microsoft continued growth. Additionally, Microsoft’s Productivity and Business Process Application provide some strong advantages and barriers to entry versus peers, as does the Windows operating system.

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