Can Microsoft (MSFT) Help FAAMG Surpass FAANG in 2021?

2021 is set to be dominated by FAAMG, which represents the five big top-performing technology companies — Facebook (NASDAQ:FB) FB, Amazon AMZN, Apple AAPL, Microsoft MSFT, and Alphabet (NASDAQ:GOOGL)’s GOOGL Google.

The new acronym coined by Goldman Sachs (NYSE:GS) is a modification over FAANG, wherein Netflix (NASDAQ:NFLX) NFLX has been replaced with Microsoft, owing to its comparatively smaller market capitalization. FAAMG can be interchangeably used with GAFAM.

Microsoft, with a market cap of $1.659 trillion, ranks second while ranking S&P 500 stocks according to index weight, accounting for 5.4%, following Apple’s 6.7%. AMZN, FB, GOOGL trail MSFT with 4.5%, 2.2% and 1.7% index weight. Collectively, FAAMG represents 20.5% of the S&P 500 index’s weight.

Meanwhile, streaming giant — Netflix with a market cap of $235.43 billion, comes 21st in the list accounting for 0.7% of the index weight.

This is a testament to how Microsoft enriches the new FAAMG group. Much like its other top-tech peers, the Redmond-based company is transforming the way people live with focus on democratization of AI amid coronavirus crisis induced digitalization.

The fact that Netflix’s prospects are bound to the streaming market, while Microsoft’s business prospects spread across varied end-markets boost its total addressable market significantly, provides buoyancy to overall FAAMG group.

FAAMG V/S FAANG YTD

Microsoft is an all-rounder with encouraging prospects across cloud computing, AI, 5G, edge computing, gaming, enterprise communication and PC markets. The company is well poised to gain from expanding Azure clientele, solid momentum in Teams and growing user base of different applications including Microsoft 365 commercial, Dynamics, and Outlook mobile.

The company is also taking gaming to new highs with the launch of next generation Xbox Series X and S consoles. Further, positive trend in PC shipments remains a tailwind for its latest Surface devices.

Moreover, Microsoft surpassed estimates in each of the trailing four quarters, the average surprise being 12.35%. The Zacks Consensus Estimate for fiscal 2021 earnings increased 5.8% to $6.73 per share over the past 60 days, highlighting bullish sentiments for the stock.

Notably, shares of this Zacks Rank #2 (Buy) company has returned 39.1% year to date, outperforming the S&P 500 index's rally of 15.5%, on a year-to-date basis. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Year-to-Date Price Performance

Strength in Azure Platform & Teams Boosts Prospects

Growing utilization of Azure by enterprises across diverse industries is expected to be a major growth driver in 2021.

The Azure cloud computing platform provider has won the enticing Joint Enterprise Defense Infrastructure (JEDI) contract. Notably, on Sep 4, Microsoft was reaffirmed by the U.S. Department of Defense (DoD) as the winner for its JEDI cloud deal. The decision was made following a re-assessment of the submitted bids. Notably, the contract is touted to be worth $10-billion and spread over 10-years.

Further, the company’s cloud computing platform already boasts of prominent retail players under its umbrella, including Walmart (NYSE:WMT) WMT, The Gap, The Kroger (NYSE:KR) Co. and Columbia Sportswear (NASDAQ:COLM). Other Azure deal wins that deserve a special mention include Walt Disney (NYSE:DIS), AT&T, NTT Corporation, KPMG, Sony (NYSE:SNE), BMW, LG, and salesforce.com. We believe the aforementioned deal wins will instill optimism regarding Azure’s business prospects through 2021.

Notably, the company is taking the fight to Amazon Web Services (AWS) by winning market share in the cloud infrastructure market on the back of Azure’s expanding customer base.

Per Canalys data, Microsoft Azure’s market share increased from 17% in third-quarter 2019 to 19% in third-quarter 2020. Notably, Azure trails only AWS, which is losing ground in the cloud infrastructure market. This is evident from AWS’ market share of 32% in third-quarter 2020, shrinking from 33% in third-quarter 2019.

Microsoft is strengthening services across the board — hardware and software alike — by integrating advanced AI and ML tools (GitHub buyout remains notable), aimed at enabling users to access data on the go. We believe that investments in new innovative products will help the company to capitalize on emerging BYOD market, enterprise productivity and ed-tech verticals.

Further, solid uptick in Teams spurred by coronavirus-led work-from-home, stay-at-home, telehealth and online learning wave deserves a special mention. Integration of Teams with Microsoft’s various inhouse offerings including PowerPoint presentations, SharePoint, Stream and Dynamics 365 makes it a winner as it makes collaboration easy and engaging, while simultaneously driving outcomes and saving time.

Moreover, the tech giant is strengthening Microsoft 365 and Dynamics 365 suite of solutions to bolster enterprise productivity. Growing clout of HoloLens 2 and Azure Kinect DK remain encouraging in this regard.

Rising spend on enterprise and business productivity amid ongoing digital transformation is anticipated to expand business avenues for Microsoft in 2021. The aforementioned factors are expected to aid Microsoft 365 solutions in strengthening its competitive position in the business productivity software market over Cisco’s Webex, Google G-Suite, Slack, Zoom Video, Dropbox (NASDAQ:DBX), among others.

Growth in Gaming and LinkedIn (NYSE:LNKD) is Icing on the Cake

In gaming segment, Microsoft is expected to benefit from robust increase in Xbox Live monthly active users and adoption of Game Pass subscriptions, driven by increased engagement led by stay-at-home wave.

Moreover, the latest acquisition of leading video game publisher Bethesda Softworks’ parent company ZeniMax Media is a masterstroke. It will enable Microsoft to gain access to all ZeniMax’s creative studios like Bethesda Softworks, Bethesda Game Studios, ZeniMax Online Studios, and Roundhouse Studios along with all their video game franchises. This brings the number of in-house development studios to 23 from 15 for Microsoft. The deal will help boost the subscriber base for Xbox Game Pass service as Microsoft will be adding Bethesda’s popular AAA titles to its Game Pass roster.

Besides, combining Project xCloud and Xbox Game Pass benefits for Xbox Game Pass Ultimate members, at no additional cost, is likely to be a gamechanger for Microsoft and bolster its competitive position in the cloud gaming space.

Further, Microsoft is not only focusing on exclusive original content but also making gaming easily accessible to all consumers including mobile users. This, in turn, is likely to keep gaming revenues ticking in the days ahead.

Additionally, recovery in advertising market through 2021 and continued strong engagement on LinkedIn platform, holds promise. The company is striving to enhance LinkedIn platform with robust AI, CRM capabilities at different levels, while maintaining user data privacy preferences.

LinkedIn is strengthening employee management tools (Glint buyout) and advancing marketing strategies (Drawbridge acquisition), which favors growth prospects. This is anticipated to boost LinkedIn’s Marketing Solutions and subscription products comprising membership, recruitment and education programs.

To Conclude

Microsoft’s strength in overall portfolio with encouraging prospects is anticipated to boost FAAMG group’s performance in 2021. FAAMG group is set to become more crucial in 2021, as tech transforms the overall ecosystem. Coronavirus crisis has set the stage for infusion of AI and Machine Learning (ML) to digitize the way of living, and in turn made tech an integral part of our daily lives.

Also, FAAMG group is poised to benefit from strong demand for e-commerce services (courtesy of Amazon) and increased media consumption (owing to Apple’s Apple services, Amazon Prime Video, Facebook, Google’s YouTube and other offerings, Microsoft’s Teams and LinkedIn) as people are mostly confined to their homes due to lockdowns, shelter-in-place guidelines and social-distancing measures.

As vaccination programs will take several months to reach a major portion of the global population, these factors are expected to boost the FAAMG group through 2021.

Moreover, via its Microsoft Consulting Services (MCS), the tech stalwart has implemented more than 230 emergency COVID-19 response missions since the outbreak in March, which includes commitments to facilitate the equitable distribution of the COVID-19 vaccine in secure and efficient manner.

The growing confidence backed by arrival of vaccines from Pfizer (NYSE:PFE), Moderna (NASDAQ:MRNA) and a host other pharma companies and gradual economic recovery, is expected to improve prospects for Microsoft and in turn, for FAAMG in 2021.

Zacks Top 10 Stocks for 2021

In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2021?

These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold.

Start Your Access to the New Zacks Top 10 Stocks >>