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There’s Simply Nothing Wrong With Microsoft

Microsoft (NASDAQ:MSFT) keeps going from strength to strength. Its December earnings release deserves to be framed in the Louvre. It shows net income up 33% year-over-year, to $15.5 billion. And that’s on 17% more revenue, or $43.1 billion. More than one-third of every dollar that came in hit the net income line. Based on earnings alone, MSFT stock seems like a win.

The Microsoft (MSFT) logo on a corporate office building during the day time.

Source: The Art of Pics /

Along with Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Microsoft now has half the world’s cloud data centers. In 2020, while everyone was talking about Zoom (NASDAQ:ZM), Microsoft grabbed nearly five times more of the Unified Communications as a Service (UCaaS) market.

Microsoft is now the second-most-valuable company in the world, trailing only Apple (NASDAQ:AAPL). But the gap there is growing, and now stands at $650 billion.

The Most Successful Cloud Czar

The only disturbing thing about Microsoft right now is that you can’t find any bad news on it.

While less dependent on advertising than Facebook (NASDAQ:FB) or Alphabet, the ad network of Microsoft’s LinkedIn is coming off a record quarter, with $2.58 billion in revenue. Even its search business, tiny next to Alphabet’s, drew $2.18 billion. Microsoft paid $26.2 billion for LinkedIn back in 2016 and was widely criticized for it. The critics are silent today.

Microsoft’s quarter was strong across the board. The company’s release focused on the cloud, but its Xbox gaming unit also had a big quarter. Revenues there came to $15.1 billion.

While Congress and President Joe Biden’s administration want to move against Big Tech, Microsoft’s name is absent from the discussion. That’s because MSFT has already been in the barrel, having spent a decade under court supervision, which ended only in 2012.

The only concern anyone can have about Microsoft is its valuation. Investors are paying over 11 times revenue and 36 times earnings for Microsoft shares. But even that is more a criticism of the market than the company. The average price-to-earnings ratio (P/E) on the Nasdaq is almost 26, and Microsoft’s results are superior.

Nadella’s Reign

Satya Nadella became Microsoft’s CEO in February 2014. At the time, shares traded under $40. The only reason to buy it was the 28 cent per share dividend, yielding about 3%.

Since then, the shares are up over 500%. They opened Jan. 27 at $238 and are likely to rise from here. The dividend has doubled, but it now yields less than 1%.

Nadella’s biggest challenge today may be slotting in new executives. His coaching tree is like Kansas City Chiefs coach Andy Reid’s. Brad Anderson recently left for Qualtrics, which is preparing its initial public offering (IPO). Julia White just left to lead marketing at SAP (NYSE:SAP). Head of corporate strategy Kurt Del Bene is also retiring at the end of June. He won’t be replaced; responsibilities will be divvied up among other executives.

Nadella has called the company’s strategy “cloud-first, mobile-first,” with an emphasis on cutting-edge technologies like augmented and virtual reality. It has all worked. The company is a case study for corporate success.

For critics of executive pay, Nadella may now be the most underpaid executive in technology. He is worth an estimated $250 million, and he earns $40 million each year. But his leadership has made cofounder Bill Gates a centi-billionaire, despite Gates’s ongoing attempt to give away his fortune.

The Bottom Line on MSFT Stock

I feel a little of Gates’s pain. I put some retirement cash into MSFT stock soon after Nadella took over and reinvested the dividends. It has grown fivefold.

Nadella is still just 53. Most of his executive team isn’t much older than the internet, either. There seems to be no more mountains to climb. The task ahead is to find some, to let everyone know what they are and to start climbing again.

At the time of publication, Dana Blankenhorn owned shares in AMZN, AAPL and MSFT.

Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn 

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