Just a year back, Microsoft (MSFT, Financial) was being perceived as a giant and clumsy behemoth that was trying to catch up with latest tech trends and failing most of the times. However, after the appointment of Satya Nadella, the organization has seen radical changes from lean product management to cutting of employee size and it is because of these actions that the company has gained its valuable stature again. On Friday, Microsoftâs total market value crossed the $410 billion mark thereby surpassing Exxonâs value of $404 billion. Currently trading at around just shy of $50, Microsoft is on its way back to glory and let us therefore analyze to see if the stock represents a good investment bet.
Getting value on the table
Since April 2013, Microsoftâs shares have risen a phenomenal 70 percent and as per data; the shares have outperformed the tech-heavy NASDAQ Composite Index, which gained around 45 percent in the same period. The stock hit $50.04 on Friday, its highest point since early 2000, before slipping to the $49.50 range in afternoon trading. To be fair, this is a great achievement considering the fact that prior to Nadella's appointment, the company seemed to be firing in all directions but without any proper certainty on any one idea. However, in the previous earnings call, the focus of the new CEO in mobile and Cloud computing has installed faith in investors who are now seeing Microsoft as a highly valuable company.
In the first quarter of fiscal 2015, Microsoft delivered a record revenue of $23.2 billion, but net income decreased 14 percent to $4.5 billion from last yearâs $5.24 billion. However, this drop in profits was largely related to $1.14 billion of integration and restructuring expenses following the Nokia phone business acquisition. As it turns out, Nokia was also a big driver in pumping Microsoftâs revenue to record highs as the company was able to sell around 9.3 million Lumia phones in the quarter as compared to 8.8 million units in the last year quarter. In alignment with Nadellaâs mobile-first Cloud-first world, the company has been focusing on low-end to push growth. The Lumia 930, 630, and 530 were all launched and made available during the recent quarter, and Microsoft has been increasingly signing new hardware partners in 2014.
Mobile first, Cloud first
Besides a strong-selling Nokia, Microsoft stepped up its game in the competitive and lucrative tablet market with the introduction of Surface Pro 3. Currently available in 28 markets, Surface Pro 3 has been instrumental in pushing the companyâs revenue from Surface line of products to a whopping $908 million, a massive 127 percent hike from $400 million in the prior year. Received well by consumers and tech pundits for its 12-inch display and features that make it an alternative for notebooks, it is expected that this could be the next billion-dollar business for Microsoft. As a matter of fact, Nadella confirmed in the earnings call that the pace of unit sales for Pro 3 was twice that for Pro 2. For investors, I advise staying on top of Microsoftâs Black Friday sales as that will be a good indicator to gauge the potential of Surface business in the coming times. Analysts are expecting a positive reception for Pro 3 for Black Friday sales and therefore investors could see some good news in store.
Mobile is one pillar of Nadellaâs grand strategy to bring back Microsoft on its glory course and definitely the other is the Cloud. As per the earnings data, the companyâs commercial Cloud business grew 128 percent thanks to Office 365, Azure and Dynamics CRM. On the consumer side of Office, 7 million people are now subscribed to a mix of Office 365 Home and Personal, up from 5.6 million in the prior year. However, Office consumer revenue slid 5 percent overall thereby highlighting the need to push customers towards cloud version of the Office. Now that I have begun talking on Office and cloud, let me tell you about the recent deal that Dropbox and Microsoft agreed upon. Both the companies are partnering to integrate Microsoft Office with the Cloud-storage platform more closely than any other save Microsoftâs own OneDrive service.
âToday, Dropbox has 300 million users, of whom 70% are international, and a ton of them use Dropbox to get work done,â said Dropboxâs Ilya Fushman. "These people have uploaded something like 35bn Office files. Today, they get a great experience on the desktop, but what weâre doing now is taking that experience to mobile and the web.â Therefore, it is clear that Microsoft intends to push for a better integration of its office application and cloud power in order to deliver a seamless experience to its customers and I believe this will definitely bode well for the companyâs overall Office revenue.
Final words
In my last article titled âIs Amazonâs (AMZN, Financial) dominance in the cloud under threat?â I mentioned the strong growth of Microsoft Azure âĂ i.e., the Cloud division of the company and how it was becoming a big threat to Amazonâs AWS. In terms of absolute numbers, Amazon is still the kingpin, but if we see the growth, Microsoft has achieved a growth of 136 percent in its Azure business on a rolling annualized basis. Microsoft has realized that in order to expand its revenue-generating and high-growth business âĂ i.e, Azure, partnerships â is going to be the key. Just a couple of days back, New Zealand IT services provider Datacom reported that it had successfully delivered the worldâs largest SAP migration to MS Azure. News like this is definitely going to expand the companyâs Azure platform and investors can expect to see the growth momentum materialize to sustainable revenue.
The recent uptick in price to around $50 has pushed up Microsoftâs valuation to 16 times its fiscal 2016 projection. As such, the stock has become a bit overvalued when compared to its peers on the expectations of a healthy mobile and cloud business. However, I would still advise going for the stock as the opportunities for Microsoft are huge and since it is at the center of the next tech trends, this stock is a justified buy.
