The shares of Microsoft have surged a phenomenal 40% over the past 12 months riding on the appointment of the new CEO Mr Satya Nadella. Even though the company has not made any big leaps in its core business operations but one thing that has come out clear since the appointment of Mr Satya Nadella is that Microsoft has acquired a bold ability to make tough decisions. May it be a massive job-cutting exercise, dropping a product line or parting with Android for selected Nokia devices, the new CEO has made some noteworthy and brave decisions to re-organize the company. There is a lot in store for Microsoft in the near future and let us analyse if these opportunities and challenges make the company an ideal investment for your portfolio.
Can Windows 9 be the saviour?
There is hardly any doubt about the fact that Windows 8 failed miserably to achieve the success and fame like the previous operating systems from Microsoft. However, the perception about Microsoft’s latest operating system seems to have improved after the company released the updated Windows 8.1 as it fixed a good number of shortcomings and bugs. Now, the entire tech community is excited about the next version of Windows operating system, a peek into which was given by Mr Satya Nadella in the latest earnings call. This is what he remarked:
The next version of Windows will "streamline" from three operating systems -- Windows, Windows RT, and Windows Phone -- "into a single, converged [OS] for screens of all sizes."
Thus, it does not require a lot of explanation to understand that the new OS which is rumoured to hit the market soon will bring about some notable and radical changes. The next version of Windows which is codenamed Threshold and likely will hit the market as Windows 9 is not going to be about a single UI that magically scales across devices. There won't be a desktop on your phone, and it's unlikely that touch-oriented Live Tiles will appear by default when Threshold loads on PCs and laptops. In effect, the one Windows theory should not be confused to be a unified OS working across all device types because there will still be different versions of the OS for different device types and different group of users.
As per Nadella’s vision one can expect amalgamation at an architectural level wherein the development of Windows for each device will no longer be driven by individual teams, but instead by one unified team. Already this team is working to develop one Windows operating system that can then be used on most, if not all, of Microsoft's devices. Beyond making it easier to develop programs, a unified Windows system will make it easier for the company to provide other services, such as security updates and cloud services. Also, the company will be able to reduce redundancies by creating a unified team of Windows developers.
Grabbing the cloud
Besides the development of a new operating system, this Redmond giant is also muscling in powerfully in order to grab a share of the highly attractive cloud computing market. In a recent strategy memo, Mr Nadella talked about “platforms” as one of Microsoft’s two dominant business themes and elevating Azure and other newer initiatives into the same plane as the Microsoft Windows operating system.
A bitter price war with the long leader in cloud computing market, Amazon, has definitely helped Microsoft gain considerable foothold in the market. Analysts have strongly signalled the rising stakes of Microsoft in this area which could prove to be a considerable threat to Amazon. Fancy this, Azure (Microsoft’s cloud platform) grew its commercial cloud services revenue 147 per cent on an annual basis in the second quarter of 2014, and has an annualised run rate of $4.4bn. As a result of the aggressive investment in cloud services, Microsoft has built a position where companies and consumers are buying more software and services by online subscription; businesses are doing more computing in Microsoft’s data centres (or in their own with Microsoft’s help). If Microsoft can sustain this growth rate in its cloud business then it may not be hard for the giant to realize Mr Nadella’s dream of making Microsoft fit for a cloud-first world.
Takeaway
In the recent results, Microsoft announced that its profits slid on mobile as Nokia continued to lose money. In my opinion, the overall earnings would continue to experience the negative impact of Nokia’s bleeding for a while. Though the management has taken some bold steps to re-organize Nokia’s business, their implementation would take adequate time and investors should be cautious of this fact. However, apart from the mobile business, Microsoft looks in a flowery position in terms of product development and investment in cloud services. For now, prospective investors should watch the company from the sidelines till there is some sustainable momentum in its mobile and cloud business.
