Microsoft (NASDAQ:MSFT) is known for its PC operating system and Office platform, but one of the company's most important up and coming segments is the server division. According to our estimates, the Windows & SQL Server division makes up around 20% of the company's value and is worth more than three times the combined values of the more publicized products such as the Xbox, Bing, Windows Phone and Skype. Due to the large impact that the Windows Server has on Microsoft's value, we were encouraged with the announcement of the launch of Windows Server 2012, a cloud OS designed with focus on cloud computing.
As cloud usage expands, consumers will be able to access their data from smaller, lighter devices instead of having to carry bulky hard drives. However, the data that users want to access must be stored somewhere, and the poor news for local storage providers is great news for back-end server providers such as Microsoft. While the Windows Server 2012 might not get the publicity that a consumer product such as Windows 8 would, we think that it is central to Microsoft's strategy as the tech industry shifts toward cloud dominance.
We think that Microsoft has positioned itself well for the cloud revolution. Not only does it have a suite of cloud-based consumer apps, it has innovated on the back-end as well. Windows Server 2012 is built specifically for the cloud, seeking to provide a fast experience for applications and a robust platform for APIs.
Microsoft's API platform with focus on cloud can be a big selling point for enterprises. The API platform will enable enterprises to create custom applications which can provide efficiency gains when run on the cloud. Additionally, reliable cloud servers can cut IT costs as maintaining a large, centrally located data center will be cheaper than maintaining local hard drives. If Microsoft can differentiate its offering from other competitors, we think that it could gain market share with its servers. If this materializes, it could provide upside to Microsoft's value.
We also think the success of the Windows server will not only drive revenues directly via sales, but also provide a solid base for the slew of consumer products Microsoft will release in the coming months. If the Windows server is unreliable, and the firm was to experience issues with its cloud offerings, it could earn a bad reputation among customers who might avoid the service altogether.
Overall, we think this is a great product launch by Microsoft. In the coming months, the company plans to offer everything from servers to productivity suites and tablets to enterprises. We look forward to the year-end results to see how these products will perform. We currently have a $41 price estimate for Microsoft, which is approximately 30% above the current market price.
Disclosure: No positions