While stock in Apple Inc. (NASDAQ:AAPL) and Amazon.com, Inc. (NASDAQ:AMZN) has been on fire since the start of the year, Microsoft Corporation (NASDAQ:MSFT) shares seem becalmed. MSFT stock is up 6%, adding about $25 billion to its market cap, but that gain not only trails its tech rivals, as the NASDAQ average is up 9.56%.
How bad is it? It’s so bad that Amazon founder Jeff Bezos is threatening to overtake Microsoft co-founder Bill Gates as the world’s richest man. He’s just $10 billion behind after trade closed Mar 29.
This is not down to any complacency on the part of CEO Satya Nadella and his team. If anything, they’re moving faster than ever. But Microsoft’s days as a monopolist are over. Its products must all earn their way. They’re all facing competition in the marketplace. A person or even a company can live without MSFT, and while the company may see this as liberating, some investors are treating it as a reason to worry.
MSFT Stock: A Gaming Competitor
For example, Microsoft investors should be bullish at its efforts in gaming, but there is plenty of competition.
Gaming is where developers, and customers, are pushing the envelope on PC performance. People will spend a lot more for a game machine than for any other type of console device. MSFT stock is in the middle of it.
The latest version of Windows 10, called Creators Update, will feature lots of new gaming features when it launches April 11, but it’s not the revolution the company promised when they announced it last fall.
Microsoft stock got into gaming through the Xbox console. The latest version brought in $9.1 billion last year and holds 26% of the market. But it’s not No.1, as that honor goes to Sony Corp (ADR) (NYSE:SNE) and its PlayStation 4. Nor is it the hottest new console. That’s the Nintendo Co., Ltd. (ADR) (OTCMKTS:NTDOY) Switch.
MSFT has launched its own game streaming service, Beam Streaming
, but that must compete with Amazon’s market-leading Twitch service. Game delivery is a niche controlled by privately-held Steam, founded by former Microsoft employees in 1996 and now majority-owned by Gabe Newell.
Still, there is ample room for growth in gaming, and Microsoft alone has a position in every important niche.
Microsoft Stock’s New Hope: Azure
Nadella made his name at Microsoft building Azure, the company’s cloud business. His strategy has been to put all of MSFT’s offerings into Azure, to offer its software directly to users through Azure, and to use cloud-based applications to dominate the enterprise market.
He can argue that it’s working. Microsoft’s revenue from Azure-fed businesses, which now includes Office 365, is $14 billion, and Azure should deliver $2.5 billion in hosting revenue all by itself.
While Amazon dominates the cloud infrastructure market with a share of over 80%, what investors focus on is the growing competition between Azure and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), which some analysts think Google will win. That would be a disaster for Microsoft stock.
Office 365 faces growing competition from Google’s G Suite, and that in turn means growing competition for PCs from Google Chromebooks, which are especially gaining share in education because they’re cheaper, with more of their functions online.
Nothing comes easy anymore.
The Bottom Line for MSFT Stock
Analysts are generally positive about Microsoft stock, but one-third have it off their buy lists. They expect 69 cents per share of earnings on $22.47 billion in revenue when the company reports April 27, which would represent 10% more revenue and almost 50% more profit than the company delivered in the March quarter last year.
Microsoft today is the third-largest company in the world, by market cap, at $505 billion. But its operations must race hard to stay in place. Google is ahead, and Amazon is coming up from behind. Technology dominates the stock market, and MSFT stock remains a part of most technology portfolios.
Nadella has saved the company. It’s no longer at risk to falling off pace like International Business Machines Inc. (NYSE:IBM). Its price-to-earnings ratio of nearly 31 is slightly higher than Google’s at 30, and well ahead of Apple’s at 17. But there’s not one part of Microsoft that can afford to be complacent, and that’s a sea change.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long AAPL, AMZN, GOOGL and MSFT.
