A lot of investors are taking a second look at Microsoft (NASDAQ: MSFT) because of its decision to buy the gigantic code-hosting marketplace GitHub for $7.5 billion.
Microsoft bulls will speculate that GitHub will add a lot of revenue to the software giant’s bottom line. Skeptics will wonder if the GitHub purchase indicates that Microsoft’s business model of selling readymade software to a mass market is obsolete.
So what is GitHub and why does Microsoft want it. GitHub bills itself as the world’s largest community of developers but it is really a gigantic digital warehouse full of software components. The software is in the form of code that can be used to build applications and solutions.
A good way to think of GitHub is like an auto parts store. Mechanics and gearheads go to the auto parts store to find new parts and accessories to add their vehicles. Software engineers and website developers flock to GitHub looking for accessories to add their creations.
For example a person building an ecommerce site that needs a shopping cart, an API, or a blockchain application will search for it at GitHub. The developers go to GitHub because it has the world’s largest inventory of software solution, the site maintained 57 million repositories of data. Among other things, GitHub is the world’s largest host of source code.
Why Did Microsoft Buy GitHub?
A lot of people will question Microsoft’s purchase of GitHub because the two company’s business models are very different.
Microsoft sells prepackaged solutions built by its in-house engineers to a mass market. GitHub is an open-sourced marketplace that makes an incredible variety of solutions created by an open-sourced community available to all.
There are many reasons for Microsoft’s purpose, a big one is to keep GitHub from collapsing. If GitHub Inc., were to suddenly run out of money and shut down, a lot of the code and software it hosts would become unavailable. That would be catastrophic for a lot of developers and users.
How GitHub can Make Microsoft More Secure
Another reason to own GitHub is to have some control over the unlicensed software market. By owning GitHub Microsoft can monitor the market for threats and competition. It can identify potential security threats such as Malware designed to target older less security Microsoft products like Windows XP.
The WannaCry malware which paralyzed parts of Britain’s National Health Service last year struck through XP. To counter WannaCry, Microsoft had to go back and make a fix for an operating system it stopped supporting over a decade ago.
Having access to GitHub might allow Microsoft to see something like WannaCry coming. Microsoft might be in a position to block such threats, or at least go into GitHub and find fixes for them.
Once it identified something like WannaCry, Microsoft can now ask GitHub developers for a solution. There was a good chance some developer already had a fix for WannaCry but nobody else knew about it.
More importantly, Microsoft is now in a solution to warn everybody on GitHub about threats. The company also put fixes for problems out on GitHub as soon as problems appear.
How Microsoft can make Money from GitHub
Beyond that there are many ways for Microsoft to make money from GitHub. An obvious revenue generator would be to sell versions of its popular products like Azure, Word, Windows, Excel, Explorer, etc. through GitHub.
Extra cash can be made by selling versions of Microsoft products for Linux through GitHub. A logical extension of GitHub would be a cloud based depository for code accessed only through Microsoft’s Azure.
Microsoft can also identify profitable new apps and code for sale through GitHub and simply buy them. That way it will be in a better position to tap potentially lucrative new markets like the blockchain and Linux.
Owning GitHub helps Microsoft deal with the rising tide of Linux and social coding. The growing popularity of Linux-derived solutions like Android, and Google Chrome, is slowly eating away at Microsoft’s business. Instead of trying to block the tide, Microsoft can ride the wave and perhaps guide it.
Microsoft Gets Open Source
Interestingly enough, even the Linux Foundation’s Director Jim Zemlin thinks Microsoft’s GitHub buy was a smart move. He even wrote an op-ed praising Microsoft’s move.
“This is pretty good news for the world of Open Source and we should celebrate Microsoft’s smart move,” Zemlin wrote. “Microsoft under the leadership of Satya Nadella has now completed its transition from an adversary of open source to a first-class citizen.”
Zemlin’s basic message is that Microsoft CEO Nadella gets open source and is positioning his company to cash in on it. Instead of fighting the changes, Nadella is going with the flow and growing Microsoft’s business in the process.
“If you haven’t noticed, Microsoft has been opening up a ton of code and has been hiring top developers who are deeply engaged in open source,” Zemlin pointed out.
Microsoft is a Great Value Investment
The GitHub acquisition is good news for Microsoft shareholders because the company has a long history of successfully monetizing software and profiting from new markets. Microsoft is in a great position to cash in on GitHub because it is making a lot of money from its core business.
Microsoft made a gross profit of $17.55 billion, a net income of $7.424 billion and an operating income of $8.641 billion during 1st Quarter 2018 — without GitHub, Stockrow data indicates. That gave Microsoft an operating cash flow of $12.151 billion, an investing cash flow of $3.844 billion and a free cash flow of $9.217 billion for the 1st Quarter.
More importantly, Microsoft is sitting on a vast pile of cash it can spend on the best code and solutions being offered through GitHub. Microsoft had $132.270 billion in cash and equivalents on March 31, 2018. That means it can start capitalizing upon GitHub right away.
All this makes Microsoft a great value investment that was well worth the $101.58 a share it was trading at on 13 June 2018. Microsoft is also the perfect stock to buy to cash in on the open-source revolution and the growing blockchain bonanza.
Is A Microsoft Dividend Increase Imminent?
A big advantage that Microsoft stock has over cryptocurrencies and blockchain investments is that it pays a dividend. Microsoft shareholders are scheduled to receive a 42¢ payout on 14 June 2018.
They have been receiving that payout since 15 August 2017 when the dividend was 39¢. This means that the Microsoft shareholders might see another dividend increase in August.
All this makes MSFT the perfect value investment for today’s software market and the growing open source code market. If you are looking for a safe widows and orphans stock poised for a lot of growth in the years ahead Microsoft is it.
This is story initially appeared at Market Mad House your barometer for stock market insanity.