Microsoft Corporation (NASDAQ:MSFT) currently is trading around 27 times earnings because investors are betting that its great fourth-quarter report isn’t an outlier, but a new normal. MSFT has been driven up after the company posted 83 cents per share in profits on $23.32 billion in sales. That’s more than double the bottom line, and 15% more on the top line, than a year earlier.
More important, it’s a performance Microsoft bulls believe it can repeat, as it continues its move away from selling software as a product to selling it as a service through the Azure cloud. For the three months, Azure revenues were up 97% year-over-year. Office sales were up 43%, and Dynamics — its suite of database-driven applications — was up 74%.
There remain some hardware products on its virtual shelves, like the Xbox and Surface tablet, but they’re increasingly irrelevant to its financial performance. They’re more test beds than anything else.
MSFT stock now is being driven by the brilliance of a “second-generation” tech leader.
Microsoft Is IBM
Under Satya Nadella, Microsoft has replaced International Business Machines Corp. (NYSE:IBM) as the company you can’t go wrong buying from, as the symbol of technology stability, a key dividend stock. The turnaround he has engineered since becoming CEO in 2014 will become legend in business schools, comparable during my own years of reporting only to what Lou Gerstner did at IBM in the 1990s.
It is a bullish trend, as Chris Tyler notes. More important, it means MSFT has jumped the gap between yesterday’s client-server era and today’s cloud-and-devices era, despite the ongoing failure of its devices.
Even the hardware products that Microsoft still talks about — and it doesn’t talk mobile anymore — aren’t growing. In the recent quarterly report gaming sales were up just 3%, and Surface sales were down 2%, as MSFT grew with non-seasonal products focused on enterprise customers, who buy online and through subscriptions.
That is why MSFT stock analysts slid right by its laying off of 3,000 workers in July. These were sales positions it could easily let go of.
What Comes Next?
With Microsoft’s market cap of $560 billion, what look like small gains in your stock price are big gains for the company. If it hits $100 per share, Microsoft will have a bigger market cap than Apple Inc. (NASDAQ:AAPL). That’s something bulls need to keep in mind.
What comes next is a continuation of the technology “great game,” with Microsoft pitted directly against Amazon.com, Inc. (NASDAQ:AMZN), Apple and Alphabet Inc (NASDAQ:GOOGL). The challenge is to bring artificial intelligence out of the cloud and into devices, built around business rather than consumer services.
In this new battle, Microsoft’s chief rivals will be Salesforce.com, Inc. (NYSE:CRM) — a company it once considered buying but now competes directly with through Dynamics 365, as well as Oracle Corporation (NYSE:ORCL), against which it has long competed through the underlying database niche.
The strategy is to unify software development, gamifying its entire product line so it can bring in interface ideas like virtual reality, eye control and voice. This will make it relevant to the next generation of developers whose advocacy it needs to win the 2020’s markets.
That idea of thinking younger and newer extends to how Microsoft itself does business. Out are such ideas as commissions and billable hours, in are subscriptions and alternative fee arrangements. When 2020 gets here, Nadella wants to be several years ahead of it.
Bottom Line on MSFT Stock
When you are buying Microsoft, you are betting that Nadella’s “second generation” tech leadership can create a strong bench of products and services that will keep your investment on top of the changing tech game.
Right now, that looks like a good bet.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long MSFT and AMZN.