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What Makes Microsoft an Ideal Investment Opportunity?

August 27, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

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I am sure that every commerce-oriented person on this planet would have read about the need for changing company management at optimal intervals in order to bring in fresh thinking and perspective. Well, this statement is definitely coming true in the case of Microsoft (MSFT) which installed a fresh face in form of Satya Nadella to lead the company. Now, the new CEO has already embarked on the journey to transform the PC-based business and shifting its focus toward cloud and mobile and cutting costs by divesting underperforming segments. Let us see if this renewed focus on cloud and mobile can escalate Microsoft to new highs.

The cloud is expanding

Microsoft reported in its fourth quarter and full year fiscal 2014 results that its commercial cloud revenue grew at a blistering 147% annual clip, with a current run rate exceeding $4.4 billion. The primary drivers of this astounding growth were Azure and Office 365, both of which are gaining huge traction in the market. The company saw strong commercial seat growth across Office 365 particularly with SMB customers. Additionally, it added over 1 million new subscribers to Office 365, Home and Personal and ended the quarter with 5.6 million users. Azure has also grown dramatically, with storage doubling and compute tripling this year.

It is not surprising to see that at the current growth rate, Microsoft Azure is inching closer to Amazon’s (AMZN) AWS service and becoming a visible threat. Amazon, too, reported its second quarter 2014 results a few days ago. Although the company's topline expanded by 23% to $19.34 billion, its operating loss widened from $74 million for the year ago comparable quarter to $126 million. Amazon usually lumps up AWS sales with ad sales and card agreements in its ''Other'' category. The Other category grew an overall 38.4%.

One of the big reasons that accelerated Azure’s growth is the hybrid cloud offering that allows enterprises to move certain of its data to the public cloud. This implies that an enterprise is at will to shift non-sensitive data to the public cloud and retain security-sensitive data on their private cloud. This flexibility in data management has attracted various enterprises to Microsoft Azure’s cloud ecosystem. It's pretty evident that Windows Azure has been able to maintain strong revenue growth despite the price cuts by rapidly growing its user base. Perhaps many corporate users are finding its hybrid model more attractive than AWS's model. It is therefore not absurd to say that Azure stands a good chance of catching up with AWS in terms of revenue going ahead. AWS has been competing mainly on price, but that's an advantage that is not sustainable due to blanket price cuts being implemented by most of the tech titans.

Being mobile

In the fourth-quarter earnings call, Mr. Nadella mentioned that Microsoft has started making some bold and disciplined decisions that define the company’s core as productivity and a platform company for mobile-first cloud-first world. In the paragraphs above, I have already discussed the company’s impressive advancement in the cloud segment. Though mobility goes beyond mobile devices for Microsoft, the investors and analysts are keeping a constant watch on its Lumia segment.

As per the management, Microsoft is seeing year-over-year increase in volume for Lumia. The smartphones manufactured under the Lumia brand have been identified as a solid entry into the low-end smart devices market. For instance, Lumia 530, Microsoft’s cheapest Windows phone, is all set to enter the U.K. markets with a probable price tag of $99 per device. The strategy to push low-end smartphones to Europe and other parts of the world has catapulted Microsoft’s smartphone market share in excess of ten percent in certain parts.

It is important to note that Microsoft’s mobile-first strategy is not just limited to hardware but is a vision that will allow the company to move from PC-centric operations. For instance, Microsoft's decision to release Office on the iPad now instead of waiting to release it on a Microsoft platform first, as was planned by former CEO Steve Ballmer, is a small but meaningful move.

Takeaway

We cannot turn a blind eye to the fact that Microsoft, under the leadership of its new CEO Satya Nadella, is journeying in a new direction. Though the PC market is improving, the company is keen to be a part of the two critically important trends that are pacing the tech industry. Thus, this stock represents a lucrative opportunity for investors who are seeking to participate and gain from the big changes happening in the industry i.e mobility and cloud computing.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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