Microsoft Corporation (MSFT): The Transition Beyond Windows Continues
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Microsoft Corporation (NASDAQ:MSFT) continues to transition away from its old monopolies in Windows and Office toward new markets based on its Azure cloud.
Source: Mike Mozart via Flickr (Modified)
Since Satya Nadella took the CEO chair in 2014, the company’s revenue is up just 10%, but MSFT stock has nearly doubled because the mix has changed. The company, then dependent on PC applications, now gets most of its revenue from cloud and cloud applications.
This is why I wrote at the start of the month that I was hanging onto MSFT stock, even while dumping other tech holdings like Apple Inc. (NASDAQ:AAPL). Microsoft has a long runway of growth in going “up the stack” in cloud, where it can create its own solutions in deep learning and gain maximum profit from them.
Another Good Quarter
This move continued during the quarter ending in June, with the company reporting non-GAAP net income of $7.7 billion, 98 cents per share, and revenue of $24.7 billion. This closed out its 2017 fiscal year, where its revenue of $89.950 billion remained short of 2015’s $93.580 billion, but net income has nearly doubled from $12.193 billion in 2015 to $21.204 billion in 2017.
Cloud offers investors less seasonality, higher profit margins, and even more customer control than the old Windows-and-Office model. Once your corporate data center is in a cloud like Azure, it’s very unlikely to move, and you’re open to all the other products and services coming out of Azure.
Thus, the numbers Microsoft reports should be less important to long-term investors than the strategic direction. Microsoft, unlike International Business Machines Inc. (NYSE:IBM), which is so resembles, has a secure future.
When you own Microsoft stock, you’re playing the “great game” of technology, a game now centered firmly in the cloud. You’re a direct competitor to Amazon.com Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG). It’s not a monopoly but something better, an oligopoly, potentially as profitable as the old Microsoft but more secure from government antitrust scrutiny, like the “competition” between The Coca-Cola Co (NYSE:KO) and Pepsico, Inc. (NYSE:PEP).
What Comes Next
What comes next for the company is clear, a steady reduction or deprecation in the features available on the client, like Microsoft Paint, and steady investment in new areas like deep learning. It means there are more data scientists working at Microsoft and fewer salesmen, because so much of the cloud is self-service and requires no distribution channel.
The Microsoft stock investor profile is also changing.
I could care less what Lodestar Investment is doing with its shares. I’m not looking at options or short-term risk points. I put the shares in my portfolio and forgot about them, confident that the people working on its augmented reality and artificial intelligence initiatives know what they’re doing, and know where the profit is.
This should be a key to any technology investor, as opposed to a technology stock trader. An investor wants to be able to look over the horizon, past the next recession, and feel confident that what the company they own is doing will remain relevant five years from now. A trader cares mostly about today, about the next quarter, and about the next acquisition.
Since putting $26.2 billion into LinkedIn last June, in fact, Microsoft has made 10 acquisitions, all relatively modest, all focused on either solving problems that haven’t been dealt with before, or solving problems without human intervention. Microsoft knows what scales, it knows what is important, and that’s why you keep the stock in your portfolio.
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 MSFT and AMZN.
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