Those who purchased Microsoft Corp. (MSFT, Financial) stock in the late 1980s remember well the heady days. As sales of its Windows operating system and office software products exploded, shares of the company followed suit. In 1987, shares were trading at approximately 37 cents; by 2000, the price of Microsoft stock was $45.
After 2000, Microsoft stock followed the predictable path of growth companies that had entered their mature stages. From 2000 through 2012, the price of the stock was mostly flat, trading in a narrow range, reflecting a company with a stable and reliable earnings history.
Starting in 2013, however, for long-term shareholders present at the creation, it was beginning to look like déjà vu all over again: Microsoft was experiencing it fastest rate of growth in over a decade. Since 2013, the price of Microsoft has nearly tripled, from approximated $27 in January of 2013 to its May 24 closing price of $97.
Microsoft shares are up 42% for the past 12 months versus 19% for the Dow Jones Industrial Average. The company expects its revenue to be up 13% from last year.
What explains Microsoft's change from a bland, uninspiring company to one that has captivated securities analysts?
Although Microsoft has no intention of jettisoning its popular office software programs and Windows operating system, since joining the company as CEO in 2013, Satya Nadella has made entry into cloud software services a focus of his strategic business plans for the company.
At its latest developer conference, Microsoft announced its new product direction: a massive global network powered by artificial intelligence.
Microsoft is staking its future on its ability to deliver cloud services centered within its worldwide Azure network that will offer corporations tools and services embedded within that network operating around a core of artificial intelligence systems. Microsoft took steps to implement that strategy with its recent acquisition of Semantic Machines Inc., a company that works on "conversational AI" software.
"Combining Semantic Machines' technology with Microsoft's own AI advances, we aim to deliver powerful, natural and more productive user experiences that will take conversational computing to a new level," Microsoft said in a press release on May 21.
Microsoft’s new business plan seems to be bearing fruit. As reported by Synergy Research Group, cloud revenues have been climbing 51% for the past year to $15 billion. This follows on the heels of full-year revenue growth of 50% in 2016 and 44% in 2017.
Based on the scope of the potential market, it should come as no surprise that other tech companies have vied for a slice of the fast-growing and lucrative cloud computing business. Amazon (AMZN, Financial) and Google parent Alphabet (GOOG, Financial), like Microsoft, have invested billions in the new platforms.
Although all three companies have devoted enormous resources to compete successfully in the burgeoning cloud corporate business services, Microsoft’s continued earnings growth is contingent on its success in selling its cloud computing platform. At present, both Google and Amazon derive a significant portion of their revenue from advertising (Google) and online retail sales (Amazon).
Presently, in terms of market capitalization, Microsoft is the fourth-largest company in the U.S. stock market, behind Apple (AAPL, Financial), Google and Amazon. Morgan Stanley believes Microsoft’s current revenue trajectory has the potential to make it a $1 trillion market cap company.
However promising Nadella’s plans for Microsoft’s continuing expansion of its existing cloud service may be, some are skeptical about its ability to compete successfully and expand its footprint. Although one must consider the source, Amit Singh, a Google executive, expressed doubt during a recent interview with the Wall Street Journal.
Concerning Nadella’s recent emphasis on making Microsoft a leader in cloud computing, Singh commented, “He seems to have gotten off to a good start. You have to do more than lip service, though. They don't think data centers and networks. On the mobile front, they are trying but that's not their core. Neither cloud nor mobile is their core capability.”
Only time will tell if Singh’s prognosis is correct.
Disclosure: I have no position in any of the securities referenced in this article.
