It’s not by much, but it’s there. Alphabet Inc (NASDAQ:GOOGL), the parent of Google, was valued at 30.35 times last year’s earnings as the market opened March 10. Microsoft Corporation (NASDAQ:MSFT), the parent of Windows, was valued at 30.48 times earnings.
Seen solely through the prism of financial reports, this makes no sense. Microsoft revenue for its fiscal 2016 was its lowest in three years. Alphabet’s margins remain superior and its top line was up 20% in 2016 — “The Google” recorded more revenues than “Mister Softy” for its most recent fiscal year.
Why all the investor love for MSFT stock?
Credit the transformation engineered by CEO Satya Nadella, and a new enterprise buying cycle. Simply put, the cloud is where the action is, and Microsoft has essentially become International Business Machines Corp. (NYSE:IBM), the default choice for running cloud applications.
Cloud App Dominance
Enterprises — that is large businesses, governments and institutions — are finally moving to the cloud in the form of cloud applications. These include software used for collaboration, marketing, planning, human resources, and for information management.
The importance of this market, and its potential, can be seen in the recent action of IBM. Its revenues and margins improved dramatically during its most recent quarter, and the stock has risen 28% over the last year. IBM’s price-to-earnings metric is still in the mid-teens, but if it can keep the top-line momentum growing when it reports next month, it could be a buy.
Synergy Research writes this week, however, that Microsoft is leading the enterprise application charge. They are a leader in half the niches identified by the research company, the only cloud software firm identified in more than one area.
The one area where GOOGL is even competitive, writes Synergy, is cloud collaboration, shared office applications like Microsoft Office 365 and, on Google’s side, the G Suite. Microsoft took the overall market lead in the second quarter of last year and has not looked back.
You can start to see the turn in the last few quarterly reports. MSFT revenues of $24.09 billion were up nearly 20% from the previous quarter’s $20.45 billion, and more than 20% of that money hit the net income line. Alphabet had more revenue, $26.06 billion, but slightly less of that money fell to net income.
Remember: What matters with stocks isn’t what you did, but what you’re doing, and what you can be expected to do. Expectations for MSFT stock are suddenly sky-high. Thus Microsoft’s earnings are worth more.
This week, Alphabet tried to halt that momentum at its Google Cloud Next event. How well it succeeded won’t be known for some time, although it was making big claims.
That Google faces a challenge an enterprise challenge in cloud, however, is now undeniable. It’s why the company did an “acqui-hire” of VMware co-founder Diane Greene in 2015, making her the head of Google Cloud in 2015, three years after joining the parent company’s board.
Experts Like Both
InvestorPlace writers are clued-in to the Microsoft momentum, which has the stock up 24% over the last year, outstripping Alphabet’s 17% gain.
Josh Enomoto insists the company is not overbought, Chris Lau says not to worry, and Will Ashworth explained how LinkedIn becomes the human glue tying all this together.
This doesn’t mean you should sell out your GOOGL positions and buy MSFT stock. I have both, and believe Google still has unrealized potential on the consumer side of the market. Serge Berger agrees. It’s still the one, he writes.
But it does mean you want to look closely at cloud applications for profits this year. It does mean that MSFT stock is no longer a client software play, but a cloud play, and that its best days may yet be ahead of it.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long MSFT and GOOGL.
