Through Office, Windows, Azure, SQL Database Management System, LinkedIn, Github, and its numerous other products and services, many of which benefit from both network effects and high switching costs, Microsoft has cleverly positioned itself as a toll road over which nearly all businesses must pass. Furthermore, the company’s embrace of the open source movement in IT, its shift to a more subscription-and-cloud-based model, and the rapidly-expanding value of its growing network of services have all made this toll feel like much more of a win-win for customers. We believe this dynamic will allow for consistent price increases in its subscription renewals. Additionally, we believe Microsoft will continue to benefit both from long-term growth in global GDP as well as the continued migration of businesses to the cloud. Remarkably, despite its long runway for growth opportunities, it is likely that very little capital will need to be reinvested to achieve this growth, increasing the earnings multiple investors should be willing to pay for the business.
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