What Microsoft Corporation (MSFT) and Tesla Motors Inc (TSLA) Say About Investors

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We admire Tesla Motors Inc (NASDAQ:TSLA) CEO Elon Musk very much, but as it turns out, we’re apparently far more likely right now to put our money into a less-risky venture like the one Satya Nadella runs — Microsoft Corporation (NASDAQ:MSFT). At least if recent returns in MSFT stock and TSLA are to be believed.

What Microsoft Corporation (MSFT) stock and Tesla Motors Inc (TSLA) Say About Investors

Over the past year, Microsoft has tacked into the winds buffeting tech stocks and brought in a capital gain of 6%, while increasing the dividend on MSFT stock by 10% and its yield to 2.6%. TSLA, which eked out a profit in its September quarter but generally loses money, is down 10%.

Both Microsoft and Tesla have big, long-term plans. What makes them different is Microsoft’s ability to profitably execute on those plans for shareholders, minimizing risk while promising growth — even if it has yet to deliver on the growth promise.

Who Is Changing the World?

Microsoft is changing the world just as much as Tesla is, but in a less obvious way. And one that fits with current technology trends.

Cloud represents the most profound change in computing since the creation of the mainframe in the 1950s. Nadella was running Microsoft Azure before he became CEO almost three years ago, and he has remained committed to cloud as CEO.

Microsoft’s capital expenditures peaked in the third quarter of 2016, and it now regularly spends over $2 billion each quarter on new datacenters.

By increasing its datacenter count, MSFT is not only able to deal with local government demands — it can provide redundancy and resilience to all its users. It’s the kind of resiliency the Internet itself was built on; when a path is down data routes around it. Think of what Microsoft is building, then, as an internet of clouds.

Clouds provide both storage and a store for Microsoft software products. Subscriptions make revenue steadier, eliminating seasonality. While total revenue has held steady in 2016, profit margins are up, with MSFT stock now bringing $1 out of every $4 to the net income line.

A Base for Prudent Risk-Taking

Steady revenue and rising profit gives Nadella a base on which to take hardware risks that, unlike predecessor Steve Ballmer’s failed bet on Nokia Corp (ADR) (NYSE:NOK), won’t break the bank.

The Microsoft Surface was laughed at in 2012 when it was introduced as a tablet under Ballmer. But now it’s a broad product line of laptops with detachable keyboards that can maintain a price point near $1,000 and includes a high-end desktop replacement, a $3,000 Surface Studio. The Studio includes a new interface called a “Dial” that delivers much higher precision than the old mouse-and-stylus.

The success of Surface as a branding device may even allow the company a way back into the phone business, which analysts had written off with Nokia.

In all these cases, Microsoft is aiming at the high end of the market, so it can limit production, assure profit and provide a target for its remaining OEMs to shoot for.

MST Stock Getting Above the Market

It can be argued, then, that Nadella is pursuing a strategy surprisingly close to that of Tesla. He is investing ahead of the market, creating products that are priced above the market, turning Microsoft into an aspirational hardware purchase rather than a mid-market player.

The difference is the cloud. Growing cloud revenues provide a base for prudent risks, a base that Tesla lacks, for all its flash and panache.

It means that MSFT stock is now delivering a higher price-to-earnings multiple than Alphabet Inc (NASDAQ:GOOGL), while before Nadella’s ascension its multiple was closer to that of Apple Inc. (NASDAQ:AAPL) currently.

For investors, that spells profit in any language. Prudent risk beats swashbuckling every time.

Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2016/12/microsoft-corporation-msft-stock-vs-tesla-motors-inc-tsla-risk/.

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