Microsoft Corp (MSFT)

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How Microsoft's Empire Will Expand to 5G
By: Motley Fool | April 1, 2020

• The tech giant acquired mobile specialist Affirmed Networks and the growth opportunities it brings.

The coronavirus-induced explosive growth of some of Microsoft's (NASDAQ:MSFT) services bodes well for the tech giant, at least in the short term. It recently reported an impressive 775% spike in its cloud services in regions that have enforced social distancing. But it remains to be seen whether these strong tailwinds will persist after employees can again work from their offices.

In contrast, the agreement to acquire Affirmed Networks that Microsoft announced last week looks less spectacular, but it represents a significant and sustainable new long-term growth opportunity for the company, no matter how the coronavirus situation pans out.

What Microsoft acquired
Microsoft didn't disclose the terms of the transaction. According to Bloomberg, the deal valued Affirmed Networks, founded in 2010, at $1.35 billion. In any case, the size of the deal pales in comparison to Microsoft's previous acquisitions of LinkedIn and GitHub for $26.2 billion and $7.5 billion, respectively. Yet the growth potential of Affirmed Networks' technology under Microsoft's leadership seems significant.

Affirmed Networks proposes software solutions for mobile operators to manage and run their mobile networks on any combination of public and private clouds.

The deployment of 5G over the next several years should boost the need for these types of products. The better performance 5G promises over 4G should improve mobile users' experience. But the extra features and advanced services Affirmed Networks developed according to the 5G specifications are no less important for mobile operators. For instance, they can price different levels of services (network slicing), and they can combine Wi-Fi and 5G in a transparent way. In addition, support functions such as automation (automatic deployment of features) and analytics (real-time statistics and reports) will help the telecommunication vendors managing their networks.

CEO Anand Krishnamurthy claims that more than 100 customers, including giant telecom companies AT&T and Vodafone, are already using some of these services, but no other financial metrics (such as revenue or cash flow) were revealed.

The 5G infrastructure opportunity
This is not the first step for Microsoft into the 5G world. Last year, Microsoft and AT&T announced a strategic alliance that leverages edge-computing capabilities (decentralized data centers) and 5G technology.

But the acquisition of Affirmed Networks transforms Microsoft into a provider of solutions for mobile operators. Thus, the tech giant will tap into the large 5G infrastructure market that research company MarketsandMarkets estimates at $47.8 billion in 2027 -- a compound annual growth of 67.1% over that time frame. Microsoft's opportunity represents a portion of the broader scope of that study, but the point is, the long-term growth potential seems material, even in the context of the tech giant's huge revenue base of $125.8 billion during fiscal 2019.

In addition, Microsoft could leverage its cloud infrastructure by running Affirmed Networks' software on its cloud platform, Azure. Granted, Affirmed Networks' solutions run on any cloud. But interoperability corresponds to Microsoft's strategy. For instance, during the last earnings call, CEO Satya Nadella touted the success of Azure Arc, a management tool built for any cloud. Thus, I expect Affirmed Networks' software to remain compatible with Azure's competitors. Yet Microsoft could still profit from cross-selling opportunities and prioritize its own cloud platform.

Looking forward
Investors should pay close attention to Microsoft's next earnings call at the end of April. Management should shed some more light on its strategy with the acquisition of Affirmed Networks.

In addition, with $137 billion of cash and equivalents and only $69.6 billion of debt at the end of last quarter, the company could acquire other tech companies to increase its exposure to the fast-growing 5G infrastructure market.

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