Microsoft Corporation (NASDAQ:MSFT) went public in 1986, a minnow next to mighty International Business Machines Corp. (NYSE:IBM). The saying was you couldn’t get fired for buying IBM. MSFT stock holders hoped for the same.
Today Microsoft is everything IBM once was, and more. It is the dominant enterprise software company, with a market cap of almost $650 billion, and its cash and short-term investments of $138 billion is closing in on IBM’s total market cap of $139 billion.
After stumbling during the last decade under U.S. government antitrust charges, Microsoft is now a dominant cloud services provider. The Redmond, Wash. company recently announced quarterly revenues of $24.5 billion, up 12% year over year, and net income of $6.6 billion, up 16% Y/y. Its cloud revenues were up 89%.
This is happening despite Microsoft’s loss of once-impregnable monopolies in operating systems and office applications, and despite its failure to crack the mobile phone market, not to mention its loss of dominance in video game consoles to Sony Corp. (ADR) (NYSE:SNE)
MSFT’s New Vision
It’s happening because Microsoft found a new leader within its ranks in 2014, Satya Nadella, who focused resources on the Azure cloud, on putting all the company’s software on it, and on building and hosting software from that base.
Nadella also ended the company’s ongoing war with open source, and has built a corporate culture based on empathy, an often-overlooked value in the highly competitive U.S. tech market.
It took time to win over Microsoft critics and cynics. I didn’t personally buy in until October 2015, but since then my investment is up 57%. Microsoft’s growth trajectory is now set, and revenues for the December quarter, to be reported early next year, are expected to reach $28.3 billion, with profits of 86 cents a share, nearly matching the most recent quarter.
That, too, is different. Microsoft revenue used to be highly seasonal, customers waiting until Christmas to get new hardware and software from stores. Now it’s nearly all cloud-based subscriptions.
Room for Improvement
The old Microsoft was an arrogant monopoly that tried to be all things to all people. Nadella’s Microsoft is no longer a monopoly, but a cooperative giant with a global network of scaled data centers, including two in South Africa and two in Australia opening soon.
Despite the overwhelming success of Nadella’s approach — selling cloud infrastructure, platforms, and a host of applications — there remains room for improvement. Microsoft is having to invest in its own game software to catch up with Sony’s Playstation. It was forced to kill its Kinect game interface. Its Skype video phone service is prone to breakdowns. Microsoft is still being crushed in mobile. And, the Cortana voice interface lags competitors from Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL).
A few years ago, each of these failures would have been evidence of Microsoft’s troubles. Now, with the heart of the company fixed, they’re simply the company’s unmet opportunities.
The Bottom Line on MSFT Stock
Microsoft is now a favorite of analysts, with 24 of 33 calling it a buy. It’s once again a “must have” stock, as InvestorPlace colleague Josh Enomoto says, up more than 35% this year, the kind of stock you can buy with confidence and a long-term view. If you picked it up when Nadella’s appointment was announced in February 014, you’d have more than doubled your investment value.
No one today is making a mistake buying from Microsoft, or buying MSFT stock. It is what IBM was.
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 to him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.