When Bill Gates stepped down as CEO of Microsoft Corporation (NASDAQ:MSFT) in early 2000, he left a major void. His replacement, Steve Ballmer, did not have anywhere near the same innate leadership abilities.
As a result, MSFT stock suffered a prolonged period of stagnation. Note that Ballmer missed important trends like mobile, which Apple Inc. (NASDAQ:AAPL) capitalized on. Another big issue was that he did not move fast enough to transition the legacy software platforms, which were based on outmoded approaches like on-premise installations.
Another big issue was that he did not move fast enough to transition the legacy software platforms, which were based on outmoded approaches like on-premise installations.
But of course, things changed in a big way in February 2014 when Satya Nadella took the helm. He wasted little time in restructuring the operations, such as with retooling the software, cutting costs and unloading ailing businesses (such as the division for mobile devices).
The result is that MSFT stock has been rejuvenated. For example, during Satya’s tenure, the shares have posted a return of over 200% — greatly outpacing other old-line tech operators like International Business Machines Corp. (NYSE:IBM) and Oracle Corporation (NYSE:ORCL).
MSFT Stock Factor #1: The Cloud
The cloud opportunity is enormous. Based on research from Gartner, the market is forecasted to grow at an average compound annual rate of 18% to $383.5 billion by 2020.
As for Microsoft, the company is currently the No. 2 player in the market with 11% of the spending, behind Amazon.com, Inc. (NASDAQ:AMZN), which has about 31%. But within the next five years or so, Microsoft may take the top spot.
Why? For the most part, the company’s cloud strategy involves two major drivers.
First, there is the extensive set of applications that have been transitioned to the cloud, such as Windows, SharePoint and Office 365. But the company has also added new offerings, like Microsoft Teams. Oh, and yes, there is also the $26.2 billion LinkedIn acquisition, which has over 500 million professionals.
Next, MSFT has a thriving business in cloud infrastructure, which is called Azure. This platform involves sophisticated tools to help companies host their own applications and provide other advanced services, such as artificial intelligence (AI).
MSFT certainly has many advantages for the Azure business. Just some include a trusted brand, a network of millions of developers, a massive footprint of data centers and a wide-array of mission-critical software applications (like SQL Server).
In light of this, it should be no surprise that Azure has been growing at a sizzling pace, with revenues jumping 97% during the latest quarter. Actually, the combined cloud business is on track to generate over $20 billion in annualized revenues.
MSFT Stock Factor #2: Financials
MSFT stock is one of only two companies that sports a sterling AAA credit rating from Standard & Poor’s. Then again, the company has a long history of substantial profits. For example, during the past year, the operating cash flows came to a hefty $39.5 billion. In all, there is about $132.9 billion in the bank.
In other words, Microsoft has more than enough resources to continue investing in its cutting-edge technologies as well as aggressive acquisitions. And yes, the company can continue to pull off large share buybacks and provide for dividend increases. Currently, the yield is reasonable 2%.
MSFT Stock Factor #3: Innovation
As seen with the success of the cloud business, MSFT has had a strong focus on innovation. But to keep up the momentum, the company will need to take things to the next level – and this means leveraging technologies like AI.
The good news is that MSFT has already been showing traction. The company has offerings like Cortana (a digital AI assistant) and HoloLens (augmented reality). But the Azure platform is also important, as it has features like deep learning.
Here’s how Nadella put it during the latest earnings report:
“The core currency of any business going forward will be the ability to convert their data into AI that drives competitive advantage. It all starts with having support for the comprehensive data estate spanning Azure Database, Cosmos DB, Data Warehouse, Data Lake, combined with SQL Server. Azure Cosmos DB is the industry’s first globally distributed database service. It enables customers to securely and reliably power data-intensive applications at unprecedented scale and performance from IoT to AI to mobile and much more.”
Azure Cosmos DB is the industry’s first globally distributed database service. It enables customers to securely and reliably power data-intensive applications at unprecedented scale and performance from IoT to AI to mobile and much more.”
All in all, the AI opportunity is something that can move the needle for MSFT stock. Keep in mind that International Data Corporation forecasts that spending on this technology will hit $12.5 billion this year, up 59.3%. What’s more, the growth rate is expected to average about 54.4% during the next three years. All of this is likely to benefit MSFT stock, which is well-positioned for these megatrends.
Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
