Landing GitHub Boostes Microsoft's Open-Source Prowess

GitHub is a community of 28 million software developers who contribute code to more than 85 million open-source software projects. Microsoft has been an avid proponent of GitHub for several years, rising to the top of the list in terms of code commitments to GitHub, and the companies have reportedly had on-and-off discussions about an acquisition for the past several years. Although this deal is roughly one fourth the size of Microsoft’s 2016 acquisition of LinkedIn, we suspect GitHub will provide unique opportunities for Microsoft Azure customers, helping support our 31% compound annual growth rate for the business over the next 10 years.

Management expects GitHub to be accretive to adjusted operating income in fiscal 2020, while EPS dilution in fiscal 2019 and 2020 will be less than 1% on a non-GAAP basis. The deal is expected to close by the end of the calendar year, and Microsoft will seek regulatory approval from the U.S. and European Union. Regulatory scrutiny could be heightened in the wake of the implementation of General Data Protection Regulation, but we believe Microsoft’s maintenance of GitHub’s independent status will ultimately enable the deal’s completion. We are maintaining our wide moat rating and $122 fair value estimate, representing roughly 20% upside from current levels.

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