Microsoft Corporation (MSFT) Gets in Bed With the Enemy

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MSFT - Microsoft Corporation (MSFT) Gets in Bed With the Enemy

Source: Mike Mozart via Flickr (Modified)

Tech giant Microsoft Corporation (NASDAQ:MSFT) just did one of the biggest 180-degree turnarounds in policy history. The move wasn’t announced with much fanfare or an Apple Inc. (NASDAQ:AAPL) style release party. No, it was basically swept under the rug.

Microsoft Corporation (MSFT) Gets in Bed With the Enemy

But the move could be one of the biggest in Microsoft’s history, signal a massive shift in business operations and boost MSFT stock to boot.

Microsfot is embracing open-source software. What a time to be alive!

This might not seem like a big deal, but it’s a complete reversal of “Mister Softee’s” previous take on Linux and other open-source programming software suites. And it could be huge over the long-term.

Microsoft and Linux (Typically) Don’t Mix

To say that Microsoft and Linux haven’t exactly been buddies over the last few years is putting it mildly. Former Microsoft CEO Steve Ballmer once called Red Hat Inc’s (NYSE:RHT) distribution of the open-source program a “cancer.”

There was good reason, at least initially. Microsoft dominated the home and business computer market. It created an ecosystem that it wanted total control of, and open source software — or software platforms developed and built on user collaboration — was a threat to its licensing business model. You couldn’t give away your code for free and risk losing out on that revenue or potential patents if someone were to tweak it and make it better.

To that end, MSFT spent the good part of a decade battling Linux and trying to snuff it out. That even included legal action at the federal level.

So the fact that Microsoft has decided to join the main open source trade group — the Linux Foundation — as a high-paying Platinum member is earth-shattering. This is oil and water, cats and dogs, Red Sox and Yankees … all playing nice.

And that ultimately should benefit MSFT stock.

Microsoft’s Future Is in Enterprise

Has Microsoft had a change of heart under new CEO Satya Nadella? Nope, this isn’t a kinder and cuddlier company. This is just about making money.

Nadella knows that the PC is dying — or at least becoming less relevant in its current form, and that’s likely to continue down the road. That’s why MSFT has been pushing so hard into the software-as-a-Service (SaaS) and cloud enterprise/server markets.

The thing is, tech people like to tinker, and that’s not necessarily possible within a locked system. Cloud, server and super computers are predominantly run on Linux and other open-source programs because it provides the freedom most IT/tech people want and crave. All of its major competitors — Amazon.com, Inc’s (NASDAQ:AMZN) Amazon Web Services, Alphabet Inc’s (NASDAQ:GOOGL) Google Compute, OpenStack and more run on Linux.

Microsoft has looked to its Azure infrastructure and server environment as its future revenue driver. So it more or less must get in bed with Linux. That’s where the money is flowing. Had MSFT stuck to its guns and said “Windows or the highway,” Microsoft likely would be looking at significant decline over the next decade.

Microsoft has been slowly courting Linux and other open-source programs for a few years under Nadella. Through partnership and development deals, Azure now runs most of the main Linux software suites, and MSFT has embraced other open source programs like big data software Hadoop.

The Linux Foundation sponsorship is just the latest step in becoming truly open.

The proof is in the pudding. One in three Azure virtual machines (VM) are Linux-based and 40% of all new Azure VM deployments are starting on Linux. Meanwhile, Azure revenue was up nearly 116% during MSFT’s latest quarter. Part of that was thanks to the Linux support, making it a real choice for enterprise.

Looking Ahead For MSFT Stock

Microsoft’s future is clearly an open-sourced one, and Nadella knows that. To compete, it has to embrace Linux and everything it entails. That’s what its customers want, so MSFT much shift course to keep its customers from its rivals. Microsoft certainly has incentive — the profit margin from its cloud platforms are nearly 50%.

At first glance, it looks like the move to support Linux is really working. Triple digit gains for revenues at Azure is nothing to sneeze at. Aside from profiting from that shift, MSFT will be able to make money from developing various apps and programs to work within this new Linux frame as well as its massive portfolio of patents tied to Android and Linux.

Microsoft’s future lies clearly in the cloud and on the world’s server computers. That future is becoming more open. So while joining the Linux Foundation might seem like a token gesture, it really is a significant step forward for MSFT stock.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Aaron Levitt is an investment journalist living in Ohio. With nearly two decades of experience, his work appears in several high-profile publications in both print and on the web. Also likes a good Reuben sandwich. Follow his picks and pans on Twitter at @AaronLevitt.


Article printed from InvestorPlace Media, https://investorplace.com/2016/11/microsoft-corporation-msft-stock-linux/.

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