I recently talked to Vineet Jain, who is the co-founder and CEO of Egnyte (a fast-growing storage operator). He mentioned that he wanted to integrate his technology with Microsoft (MSFT) and sent an email to CEO Satya Nadella.
“He actually responded and got the right people involved,” said Jain. “We then quickly put a deal together. This is something that would not have happened when Ballmer was CEO.”
Yes, MSFT is getting back on track — and Wall Street is getting the message. So far this year, Microsoft stock is up about 18%.
No doubt, turnarounds of mega tech companies are extremely hard to pull off. After all, there is always lots of competition, especially as venture capital firms continue to pump dollars into startups.
Yet when a turnaround takes hold, the results can be quite lucrative for investors for the long haul. This certainly happened in the 1990s with IBM (IBM). Then again, then-CEO Lou Gerstner knew that the old ways had to change. “IBM was enamored with mainframes because mainframes made all the money,” he said. “But if we were going to change, we had to find a way to take the money away from mainframes and allocate it to something else.”
Something similar has been happening at MSFT. The company’s core business – that is, building on-premises software and selling it via licenses – has quickly become outdated because of the emergence of cloud computing. For the most part, customers want seamless connections to the Internet, as well as a fee structure that is based on subscriptions. Essentially, it is a big-time slam of the MSFT model.
Microsoft Stock and the Cloud
The temptation for MSFT was likely to just hope that cloud computing would be a fad. Interestingly enough, this appears to have been the approach at companies like IBM, Oracle (ORCL) and SAP (SAP). As a result, they are now playing a game of catch-up, which is always expensive.
MSFT, on the other hand, has been retooling its business over the past few years. If anything, there has been an obsession with the cloud.
Just look at the Office franchise. All in all, it is a masterwork of cloud technology, allowing for seamless access, collaboration and storage across all the main platforms, including from rivals like Apple (AAPL) and Alphabet (GOOG, GOOGL).
Keep in mind that Office 365, which is the cloud version, has over 18 million consumer subscriptions. In fact, during the latest quarter, there was a 3 million increase. Oh, and there are over 60 million commercial subscriptions.
But there is another side to the cloud story, which should also be a long-term driver for Microsoft stock. It is the Azure platform, which allows companies to build and host their own applications. Yet there is alsoa hybrid option, in which a customer can use both cloud and traditional on-premises technologies. This is something that is fairly unique, but is important to many customers.
So how is this cloud business doing?
Well, for this year, the run rate is at over $8.2 billion in revenues, up a sizzling 70%. The goal is to reach $20 billion within the next few years.
But this could wind up being a low-ball figure. According to a report from Gartner, the amount of worldwide spending on the cloud is expected to jump from $130 billion in 2013 to $243 billion by 2017.
And the good news is that MSFT is one of a few players with the infrastructure, technology, expertise and trust to be a cloud provider for enterprise customers on a global scale.
In other words, the company is nicely positioned to get a nice chunk of the market opportunity.
Bottom Line on Microsoft Stock
What about the valuation on MSFT stock? Admittedly, it is not necessarily at bargain levels, with the forward price-to-earnings ratio at about 18X. But then again, it is reasonable when compared with other big tech operators. For example, SAP trades at 19X. Besides, the prospects for MSFT certainly look much brighter.
OK then, for investors looking for a way to play the cloud megatrend, Microsoft stock really looks like a unique opportunity. And again, this is really not about hoping that things will ultimately work out.
As seen in the latest several earnings reports, MSFT is showing nice gains from its investments in the cloud — and the benefits are likely to last for some time.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
