Is Microsoft Corporation (MSFT) the Next Apple?

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MSFT - Is Microsoft Corporation (MSFT) the Next Apple?

Source: Mike Mozart Via Flickr

Five years after the tragic death of Steve Jobs, everyone wants to talk about Tim Cook, and whether his reign at Apple Inc. (NASDAQ:AAPL) has done credit to Jobs’ legacy. But that legacy is a history lesson others can learn, and Microsoft Corporation (NASDAQ:MSFT) CEO Satya Nadella has been a willing student. Now he aims to out-do the teachers.

Is Microsoft Corporation (MSFT) the Next Apple?

Since Nadella became Microsoft CEO, MSFT stock is up 58%, a performance that matches that of AAPL during that time.

Even after taking out the huge write-offs from Nokia in mid-2015, Nadella’s company still gets a price-to-earnings multiple that is higher than Apple stock’s multiple.

Someone knows something. What is it? Is it just that Microsoft’s margins have been increasing the last few quarters, while AAPL’s margins have been going down for the last year? Or is there a more strategic argument to be made?

Here is the strategic argument.

MSFT: Copying What Works

Nadella was promoted as “the cloud guy” — he headed the “cloud and enterprise group” at MSFT before being named CEO, after an extensive internal and external search. And his first move, indeed, was to double down on cloud, doubling cloud computing usage in the last year, and increasing search revenue by 16%.

Customers are now accustomed to buying Office as a service (Office365) and the $26.2 billion acquisition of LinkedIn Corp (NYSE:LNKD) is designed to make Microsoft a default cloud for business users.

The move by MSFT to the cloud, with its $1 billion/quarter capital spending as an ante into the game, seems obvious in retrospect. The success of Amazon.com, Inc. (NASDAQ:AMZN), and the fall of PC sales, would seem to have mandated it.

But not every CEO makes the right move. The history of technology is littered with the names of great companies that failed to do that. International Business Machines Inc. (NYSE:IBM) failed to do that, in time to remain a market leader.

Nadella did that.

Why Microsoft’s Surface Has to Rise

Nadella felt moved to write-off all of MSFT’s Nokia business in July 2015,  less than two years after it was bought for $7.2 billion, and that move continues to cost Microsoft stock big-time in terms of revenue and reputation.

Still, Nadella has kept one device many thought he would quickly abandon — the Surface line of PCs. Their sales were up 29% year-over-year in last year’s Christmas quarter.

The Surface is now a big enough factor in the market to have its own rumor mill, much like the iPhone. The Surface Pro 4 is a bona fide hit and rumors of what may be next go all the way across the device line-up — from desktops competing with the Mac to devices like the iPhone.

Thanks to Palos Panay, who was promoted to manage the device business when Nokia head Stephen Elop was let go, MSFT now has “permission to be in hardware” after years of missteps.

Becoming a hardware company, copying the Apple model of designing product and paying for its mass production, is a huge risk, but also a huge opportunity. AAPL has more than double MSFT’s sales because of its huge lead in hardware. Hardware costs more than software, and controlling hardware is the key to leading in the software business.

The Surface has to rise.

Panay’s success has been undersold because his team had been put together under the company’s previous management structure, the Surface becoming almost a joke, thanks in part to the underwhelming performance of Windows 8.

But now with Windows 10 a year old, MSFT may finally be ready to move into the space being vacated by its Taiwanese OEMs, perhaps turning around the whole PC business.

That’s the hope, anyway.

Is Microsoft Stock Overbought?

Microsoft generated about $22 billion in profit over its last four quarters, since Nadella made the decision to jettison the Nokia division. Its market cap is $447 billion, so real progress is necessary to keep the stock flying.

But while Apple has spent the last year becoming MSFT, building cloud data centers and generating service revenue, MSFT has spent the last year becoming AAPL, learning the art of design, and making Windows more like iOS.

Investors are betting that Microsoft stock can continue to eat into Apple stock’s lead in devices, and that it can become the kind of enterprise player in the cloud era that IBM was in the mainframe era.

Those are high expectations. I’m buying them.

Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time.  Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT, AAPL and AMZN.

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Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2016/08/microsoft-stock-msft-next-apple-aapl/.

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