The Majorana Surge: How Quantum Computing is repricing Microsoft’s future

Image credit: Microsoft

As the race to commercialize quantum computing intensifies, Microsoft has subtly positioned itself at the forefront, citing a breakthrough that could revolutionize the company’s long term financial position. In a recent unveiling of the Majorana 1 chip, a topological quantum processor, Microsoft marked a major milestone not just in technology, but in the company’s future. Whilst years remain till the technology can be fully commercialized, Microsoft’s thorough investment into the sector is already influencing investors and the company's valuation, laying the base for new revenue streams for the company to go off. This article explores how quantum innovation is beginning to reshape Microsoft’s financial trajectory and stock performance over the coming years.

Revenue Upside and Strategic Positioning:

Current revenue predictions show large upsides for Microsoft as quantum computing grows. With Majorana potentially becoming operational in late 2025, 3rd and 4th quarter revenue may bode stronger for Microsoft. Whilst cloud computing currently holds to be the largest revenue segment, Majorana’s integration is expected to become an integral part of Microsoft’s operational performance. Current estimates put Majorana to add $90+ billion in sales for Microsoft by 2040, with synergies anticipated to benefit other revenue streams including Office 365, and Azure, two operations for Microsoft currently bringing in $100 billion and $63 billion. From this Microsoft stands not only to gain from future revenue streams but also improved current streams.

Cost Structure: Short-Term Investment, Long-Term Gains

In the short run, Microsoft will face higher costs, due to the extreme cryogenic environments required for the computer to run. However in the long run, Microsoft should gain from lower operating costs per useful computation, increasing the technologies cost efficiency. Additionally, other business segments including Azure, and Microsoft’s AI segments should see lower costs, with more offload costs from customers. 

One thing to be aware of is that the benefits of quantum computing to Microsoft are shared between other segments of the business, with the entirety of Microsoft benefiting as a result of Majorana. This technology does not act to influence one part of the business but has a substantial impact across the business as a whole, changing how Microsoft will move forward. 

Cash Flow and Capital Allocation Outlook

In the short run, CapEx and Depreciation and Amortization (D&A) should expect to increase, with Microsoft seeking to expand both cloud computing services, AI centers, and Quantum Computing operations. As a result Microsoft should average CapEx and D&A at 12% of Revenue. This remains a strong short term hold to have permitting that Microsoft takes advantage of expansion opportunities across all of its current operating sectors. 

In the long run, CapEx and D&A should expect to fall as a percentage of revenue with the assets maturing. As a direct result of this there is boosted cash flow, and the potential for further debt reduction by Microsoft. In the long run CapEx and D&A should expect to fall to levels of around 8% - 10%. 

Valuation Outlook

All these factors point towards a strong future potential for Microsoft, one where the company can continue on an upward trajectory, of higher valuation. Current models indicate that on a cash flow basis Microsoft is undervalued with a share price of $520. On a multiples analysis revaluation can also be seen with Microsoft, having lower multiples than competitors.  

Quantum computing is more than a technological curiosity for Microsoft, it has become a key in the company’s future success. Majorana has the potential to drive revenue, reduce cost, and ensure Microsoft’s competitive advantage across all current and future operations. As Quantum computing becomes reality Microsoft stands to reap the financial rewards of its early commitment to the quantum frontier. 

Link to DCF: https://docs.google.com/spreadsheets/d/1AsJEdcTD5xZ5Nxh-e1srxWYyEPI1TQBto7CN_JIvdl0/edit?usp=drivesdk

By: Lachlan Rowden