Microsoft advertising could ‘spur another leg of growth,’ analyst says

Raymond James Internet and Digital Media Analyst Andrew Marok joins Yahoo Finance Live to discuss Microsoft stock and how digital advertising could provide additional tailwinds for the company.

Video Transcript

AKIKO FUJITA: Well, let's talk about investors still kind of reeling from that big selloff in tech that we saw in the third quarter. But there could be some bright spots ahead. Microsoft may be one of them. That's according to Raymond James, as it resumes its coverage of the tech company with an outperform rating and $300 price target.

Let's bring in Andrew Marok. He's Raymond James internet and digital media analyst. Andrew, good to talk to you today. A number of things that you point out in this note, including gaming, cloud, digital ads as well. But talk to me about sort of the top-down view, how you view Microsoft right now in relation to some of its other tech peers.

ANDREW MAROK: Great, thank you for having me on today. We do like Microsoft in relation to some of our other tech peers at this point, just because when we look out for things like inflationary pressures, recessionary concerns, and things like that, they tend to bite more harshly on the consumer side of the equation, whereas with an enterprise software company like Microsoft dealing with such a wide product portfolio from productivity software to public cloud to operating systems and beyond, we think that the environment for a company like this with the scale that it has is very advantageous.

We cited Gartner's survey recently of a number of chief information officers that suggests that 43% intend to increase their IT spend versus 17% who intend to decrease. And we think that that's a key point in Microsoft's favor that they can consolidate spend in IT if, in the event that even CIOs do potentially feel some pressures, Microsoft's breadth of product offering and reputation should be able to backstop them.

AKIKO FUJITA: Yeah, the IT spend number you pointed to from Gartner certainly an interesting one because we have heard that from a lot of these software companies who've said, look, despite the macro slowdown, companies are still transforming or transitioning into the digital space. Why is Microsoft particularly a better bet when you think about all the other software players who are also competing in the enterprise space?

ANDREW MAROK: Sure, and I think, again, it goes back to that breadth and depth of the product offering. Can ease some potential pricing pressures in terms of bundling different aspects of the Microsoft portfolio, and the fact that it's a relatively kind of, quote unquote, "low risk vendor" in that the reputation is there, the customer service is there.

And it's really kind of built that brand ubiquity over the course of the past couple of decades, where Microsoft is kind of the currency of enterprise IT at this point, whereas if you're more of a single point solution in software, you kind of have to prove yourself in more of a way than Microsoft does.

AKIKO FUJITA: And we have seen Microsoft really start to build out the full stack when you think about workplace software, whether that's obviously Windows at its core, or you've got Teams as well. Another thing that I thought was kind of interesting you point out is the advertising side of things for Microsoft. I think a lot of people don't necessarily always think about that with the LinkedIn piece. How big of a revenue driver do you anticipate that to be?

ANDREW MAROK: Yeah, and I think that's a great call out both on the advertising and the gaming side. It's a little bit more cyclical in nature maybe than the enterprise IT spend, but we do think that they are very underappreciated growth levers for the overall Microsoft story. Advertising, yes. LinkedIn, a very big component of that, has posted very strong growth. And we still think that there's a lot of user penetration and monetization growth to be seen there.

But also with things like the Netflix deal, maybe getting a little bit more into connected television advertising, which is a very strong secular growth market within the digital ad space. Again, things like that just adding more addressable markets for Microsoft to jump into with their scale where they should be able to compete at levels where smaller competitors may find it difficult to invest those levels.

AKIKO FUJITA: And finally, Andrew, you point out that this isn't just about Microsoft kind of protecting its moat, trying to win in the spaces they're already in. It is about, as you see it, the company being a little more aggressive, $100 billion in acquisitions over the last five years. What's that next piece do you think Microsoft is going for?

ANDREW MAROK: Yeah, absolutely. I think that they have been able to flex their muscle and utilize their scale in terms of gaining footholds into more diverse markets, really pushing forward in gaming. And now with advertising maybe kind of dipping their toe in with the Xandr acquisition around a billion dollars toward the end of last year, I think digital advertising is one to watch.

This connected television deal, starting with Netflix, we don't think that it's necessarily a material revenue driver in the immediate term, but it does signal ambition. It's a very large high profile kind of tie-up between the two companies. And I think it does signal that Microsoft is looking at the digital advertising ecosystem as a way to spur another leg of growth over the course of the intermediate term.

AKIKO FUJITA: OK, we'll all be watching. Andrew Marok, good to have you on today, Raymond James internet and digital media analyst.