For years, Microsoft (NASDAQ:MSFT) was seen as a Goliath of the tech industry; a big dinosaur that was far too old and slow to make any kind of noteworthy innovations. For a long time, the MSFT stock price languished at around the $40 to $60 a share range, depending on the S&P 500 as well as general investor sentiment about the tech sector. But the appointment of Satya Nadella in 2014 as the new CEO to replace Steve Ballmer seemed to have marked a turning point.
Since then, MSFT stock has nearly tripled — hardly the slow, lumbering dino it was before. In fact, MSFT closed Tuesday at $139.29, just off an all-time high of $140.67, which now gives the company a market cap of over $1 trillion.
They key driver in recent years has been a change of culture. Now at Microsoft, Cloud comes first, Mobile next — and desktop products, their tried-and-true cash cow of years past, are simply left to pay the bills.
For Microsoft, like much of the tech sector, the future lies far removed from the desktop-related products of decades past.
Last week, MSFT reported its results for fiscal-year 2019 with revenues up 14% to $125.8 billion. The company is hugely profitable racking up margins that any Fortune 500 as well as any small-cap tech firms would be proud of. Operating earnings totaled $43 billion, making for an operating margin of 34.1% of sales, up 230 basis points from 2018.
A Few New Hurdles for the New-Age MSFT Stock
Take a glance at any Microsoft news story and you’ll likely notice that the company now focuses far less on one-off product purchases, such as Windows or Office. Instead, MSFT plans to generate double-digit growth from its service and cloud related business lines. These new business areas are effectively recurring revenue streams that will lead to sustainable long-term growth and less volatility in earnings.
As the global market for cloud computing, Software as a Service (SaaS) and Infrastructure as a Service (IaaS) grows, as do economies of scale, Microsoft will likely create a solid lead in a high-growth market with significant barriers to entry.
To give an idea of the immense size of the cloud computing market, MSFT is now in competition with Amazon’s (NASDAQ:AMZN) AWS, to win a Department of Defense contract worth some $10 billion. Details of the complex bidding process were made public earlier this month in a court ruling. In response to a complaint filed by Oracle (NYSE:ORCL), another major competitor in the global market for cloud computing services, the federal court cleared the way for MSFT to compete with AMZN for the contract.
Oracle, and before that, IBM (NYSE:IBM), had complained to the court that they were unlawfully eliminated from the bidding process. A federal judge ruled against Oracle’s motion to block the Pentagon’s 10-year, $10 billion cloud computing contract, siding with the Defense Department and Amazon Web Services in a legal battle that lasted nearly a year. These court battles are somewhat reminiscent of the early 1990s, when Microsoft often faced complaints of unlawful anti-competitive behavior from small tech start-ups as well as the U.S. Department of Justice.
The Future of Microsoft Stock Is Brighter Than You Think
MSFT is clearly betting heavily on the future of the cloud and all the high-margin services that come with it. Just this week, the company announced a $1 billion investment in OpenAI, a small startup firm specialized solely in artificial intelligence software. So far, the announcement has driven MSFT stock higher and helped it rise out of a slight ditch set earlier this month. But the longer-term benefits for MSFT will take longer to manifest.
This $1 billion investment by Microsoft, and the expected enhancements to Microsoft’s Azure platform to catapult developers building the next generation of AI applications, is just one example of how the new era of high growth, double-digit earnings for MSFT is only just beginning.
Now, rather than look at Microsoft stock as a dinosaur, we can expect its growth to be around much longer as the need for its high-tech services continues to increase with new technological developments.
As of this writing, Theodore Kim did not hold a position in any of the aforementioned securities.
