Microsoft Corporation (NYSE:MSFT) used to be a one-trick, maybe two-trick pony less than 10 years ago. My how things have changed.
Under founder Bill Gates, DOS and then Windows operating systems were on virtually every computer that wasn’t an Apple Inc. (NASDAQ:AAPL) machine. And that dominance continued unabated until the dotcom bubble burst.
It wasn’t the ensuing crash that hurt, it was the fact that tech had reached a point of inflection.
From then on, it wasn’t just about owning a fiber-optic switching company with a triple-digit price-to-earnings ratio. One of the sayings from those heady times was, if it doesn’t have a triple digit P/E, it’s not worth buying.
The crash meant the internet and tech itself was growing up. There was plenty of consolidation that happened after the dotcom crash. Some worked out, some didn’t. But it was necessary for companies that were going to survive to find a way to pivot into the new marketplace.
It was also around that time that Microsoft was embroiled in a major antitrust case with the U.S. Government. This meant that MSFT had to change on many levels, just to survive. It was crucial to find a way out of this, because most of the government computers were running Windows, and if Microsoft couldn’t find a bright path through the case, it may well lose a very lucrative long-term contract.
By 2006, Gates was out of day-to-day operations and his No. 2, Steve Ballmer, took over. While he started strong, it wasn’t long until it was apparent that doing the same thing a little differently was not going to cut it as technology was expanding rapidly and interconnections were popping among different tech fields.
In 2014, the current CEO, Satya Nadella, took the helm and began to completely reorganize the company, shedding unprofitable and unwieldy divisions and focusing on the future of the company. That meant cleaning up the mess created by the acquisition of the mobile phone business of Nokia and building a robust cloud-based business for both operating systems and for client storage.
It certainly helped that he was previously head of MSFT R&D. But some were still skeptical of his approach, especially in the early days, when the new divisions weren’t getting much traction and the established businesses were left wanting — remember Windows 8?
Now three years into his role, Nadella has gone from potential goat to real hero. And the most recent earnings number prove out his strategy. He has remained focused and disciplined, and it has paid off.
Microsoft has committed $1 billion into cybersecurity investment for its services as well as R&D. The company is reporting 600,000 to 700,000 attacks a week, up from about 20,000 just three years ago. But it’s not as much the threat as the opportunity. According to tech site techemergence.com, there’s an artificial intelligence-based cybersecurity market that will be worth $8.3 trillion market by 2035 in the U.S. alone.
And given the fact that the U.S. government is one of MSFT stock’s biggest clients, security is crucial.
Going hand in hand with this is the impressive growth of Azure, Microsoft’s cloud-based operating and storage system. Revenue growth year over year is running around 93% and Azure is getting big enough to compete with Amazon Web Services, the cloud division of Amazon.com, Inc (NASDAQ:AMZN).
Recent earnings were solid overall and there’s no reason to think MSFT stock has seen its best days already. And while its 30 P/E may look expensive, AMZN is trading at a P/E of 185. And MSFT also delivers a solid 2.4% dividend as well.
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.
