Microsoft Corporation (MSFT) has come a long way in the last few years. It has transformed itself into a diversified business with a leading market share in several fast-growing industries such as cloud computing, social media, video communication, and video gaming.
Today, the company is focused on expanding its footprint in the cybersecurity industry as well, which is likely to improve Microsoft’s long-term earnings potential in more ways than one. (See Microsoft stock charts on TipRanks)
Microsoft’s Recent Acquisitions
On June 2, Microsoft announced the acquisition of ReFirm Labs, a device vulnerability management and firmware security analysis company, for an undisclosed amount. Although some businesses have opted to embrace cloud computing, cyber threats have emerged as a major obstacle to the continued growth of this industry. That is because some businesses have decided to use traditional inhouse computing and data storage facilities to ensure the safety of their business secrets and other important data.
Microsoft, with the acquisition of ReFirm Labs, plans to increase the security of devices connected to and data stored on Microsoft Azure by providing cloud computing customers with advanced threat detection capabilities. Device builders, on the other hand, would be able to distribute secure firmware updates using Azure with minimum exposure to external threats. The company plans to position ReFirm Labs as a leading player in the cybersecurity industry with a focus on the security of connected devices.
Last week, Bloomberg published an article claiming that Microsoft has agreed to buy RiskIQ, a security software developer, in a deal valued at more than $500 million. RiskIQ is an American cybersecurity company that develops cloud-based software for detecting security threats faced by complex systems. These large systems are considered vulnerable for cyberattacks because of security loopholes that arise from their complex nature.
According to the company website, RiskIQ clients include large corporations such as Facebook, Inc. (FB), American Express Company (AXP), United States Postal Service, and Box, Inc. (BOX). Microsoft is yet to confirm this Bloomberg report regarding a potential deal, but an announcement can be expected in the coming days, according to Bloomberg.
The Big Picture at Microsoft
As one of the leading software companies, it makes sense for Microsoft to venture into the cybersecurity industry. In fact, the company already caters to millions of corporate clients who depend on Microsoft to provide software solutions to satisfy a wide variety of needs. This existing client base will be a catalyst in helping Microsoft gain traction in the cybersecurity industry.
Indeed, there are 2 ways in which Microsoft will benefit in the future as a result of its expansion into this sector. First, the company will be able to make a name for itself as a stand-alone cybersecurity solutions provider, which would positively impact revenue and earnings in the long run.
According to data from CNBC, a record amount of $350 million worth of cryptocurrency has been paid as ransom by cyberattack victims in 2020, and the numbers are continuing to increase, highlighting the need for effective cybersecurity solutions.
Moreover, a survey conducted by Insight Enterprises, Inc. (NSIT) early this year found that 80% of senior IT executives representing private companies believe their organizations lack sufficient protection against these threats. Both these statistics confirm that the demand for cybersecurity solutions will only increase in the coming years, and Microsoft, with its recent acquisitions, has the potential to grab the market share of this fast-growing industry.
Secondly, Microsoft’s investments in improving its security framework will help the company win the trust of potential customers who are concerned about moving to the cloud because of security issues. This could help the company outpace its closest cloud computing rivals and grow at a faster pace in the next few years.
Wall Street’s Take
The average analyst Microsoft price target is $298.92 per share, which implies upside of almost 8% from the current market price. Microsoft has an analyst rating consensus of Strong Buy, based on 26 Buy ratings.
If the cybersecurity solutions segment gains traction as expected, analysts are likely to boost their price targets in the future, after taking into account the expected impact on earnings.
Takeaway on Microsoft
Microsoft is expanding its horizons by making strategic investments to gain exposure to the cybersecurity industry. There is reason to believe that these investments will help the company report better-than-expected earnings in the foreseeable future. This, in turn, will help the stock market performance of Microsoft.
Disclosure: Dilantha De Silva owned Microsoft shares at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.