Do you remember the days when Steve Ballmer was running Microsoft Corporation (NASDAQ:MSFT)? It was like sitting in a boat that was slowly taking on water.
Well, the Ballmer days are long gone. Newish CEO Satya Nadella has steered this software behemoth back on course, and through years of careful pruning, has remade Microsoft Corporation as a formidable force for a decade or more to come.
Since the early days of the digital revolution, MSFT made the core of its money on licensing its operating systems to computer makers, which added value to the sales of the computers. But with the advent of open source software and other competitors moving into its traditional space, it was a more challenging environment for Microsoft.
Then, it had some bad to mediocre OS launches that endangered the company as networked systems and the internet (including the cloud) became more standard operating procedure in offices as well as with individuals. Then mobile computing hit.
The New Microsoft (MSFT) Stock
This is the transition that Ballmer was unable to get his arms around. And it’s why in February 2014 they pushed Nadella into the “Big Chair.” Nadella started his tech career with innovator Sun Microsystems and then moved over to Microsoft’s R&D division in 1992.
Part of the challenge with any tech company (especially the ones that are heavily reliant on R&D because the competitive landscape shifts so quickly) is being able to get from the lab (the R&D bench work) to fab (releasing a product for customers).
One classic example is Motorola Solutions (NYSE:MSI). It had marvelous R&D and spent a ton developing new technologies. Before it, the Palo Alto Research Center owned by Xerox Corp (NYSE:XRX) invented everything from the bean bag chair to the graphical user interface and mouse. Motorola has since been scattered around the world and XRX is a mere shadow of what it once was, because its pipelines weren’t efficient.
That was the problem at MSFT until Nadella transformed its business model.
The Future of MSFT
It has transitioned from a licensing model to a subscription model that includes powerful cloud-based tools for consumers and businesses alike.
It has severely cut its losses in the mobile phone arena, focusing on only a couple models in the next year so. It has finally launched a good OS (Windows 10) that complements its long-term integration strategy. It is killing its commercial cloud business. And its new augmented reality HoloLens is still in development, but could be even bigger than virtual reality entertainment.
It’s recently released FY17 first-quarter numbers reinforce all this as well. Commercial software and cloud based services revenues were up yet again, by 5%. But within this number is the fact that its Office 365 revenue was up 51%.
Office consumer and cloud services revenues were up 8%. Azure, its cloud storage platform saw revenues increase a whopping 116%.
Nadella & Co have released some serious long-term growth ahead in Microsoft. What’s more, MSFT stock remains shareholder friendly. There were $6.6 billion in stock buybacks in Q1, and it still kicks off a 2.6% dividend.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.