When Satya Nadella became CEO of Microsoft Corp. (NASDAQ:MSFT) about four years ago, the company was in the same box as Oracle Corp. (NASDAQ:ORCL). Both were facing a future as legacy technology providers in a cloud-based future.
Today, Microsoft, which reported higher-than-expected earnings on April 26, is once again the dominant technology provider. Its market cap is $734 billion — four times more than Oracle — and despite its record highs, 26 of the 35 analysts following it are screaming “buy” .
What Nadella knew that Larry Ellison didn’t was that the road to dominance lay in cloud-based applications.
He was willing to bet the company on that.
Solving the Next Problem
Under Nadella, Microsoft is focused on the next problem, not the last, and it’s not worried about hits to its reputation from making bold moves.
Remember Skype? Nadella’s predecessor, Steve Ballmer, paid $8.5 billion for it in 2011. That’s quietly disappearing from the Windows mobile store next month. So is Yammer, which cost $1.2 billion in 2012.
Instead, Nadella is betting billions on Azure Sphere, a system of chips and software based on Linux that is designed to bring secure sensor intelligence to what had been inert devices you had to turn on and off. Using Azure cloud on the backend is not a requirement, either.
Microsoft understands that security must be built-in for the so-called Internet of Things (IoT) to get anywhere. It needs to be assumed before people will accept the underlying technology. The company also understands that it can’t be religious about its own offerings. Thus, a major asset of its Edge browser, the ability to detect phishing scams that insert malware, is being delivered to Chrome browsers. If people like what they like, you protect what they like.
Fighting for Users
Early this decade, Microsoft had two big problems. Open source advocates hated it for its rejection of open technology and consumers found the company arrogant and unhelpful.
Nadella has made a complete turn on open source through such moves as joining the Linux Foundation and the Open Source Initiative, even walking the walk through support of Linux on Azure and in other Microsoft products.
Microsoft is fighting for customers with its security initiatives — not just through its delivery of technology to Chrome, but also in its work against tech support scams, in which thieves call users on the phone pretending to support their systems, even posing as government agents, and coming back on people who they have already hacked for “credentials” that can be used in further thefts.
Bottom Line on MSFT Stock
It’s not true, as some wags now say, that Amazon.Com Inc. (NASDAQ:AMZN) can’t beat Microsoft in the cloud.
Amazon is selling raw infrastructure, Microsoft is selling applications, and the top of the stack will always deliver more revenue than the bottom, even if the bottom is where the control lies.
The fact is that Microsoft doesn’t care about its cloud market share. It’s perfectly willing to let customers use whatever clouds they like. What matters to Microsoft is its cloud monetization share, its ability to profit from software that uses the cloud.
Microsoft stock is not cheap. It’s currently selling at over 30 times its 2017 operating earnings of $22.3 billion. The dividend yields just 1.78%, but it’s total return you’re looking for.
The shares are up 42% for the last year, 91% over the last two years and, despite all its history, it’s possible that Microsoft, not Apple Inc. (NASDAQ:AAPL) and not Amazon, may become the first trillion-dollar company.
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 danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, and MSFT.
