- Windows is saved and Azure is a contender.
- Hardware rivals are copying the Surface and Microsoft stock is now as highly prized as Alphabet.
- It's morning in Redmond.
Some laughed when Satya Nadella became CEO of Microsoft (NASDAQ:MSFT) nearly two years ago.
No one is laughing now. Since taking over as CEO in February 2014 Microsoft stock has risen at almost twice the rate of Alphabet Inc-A (NASDAQ:GOOGL) stock.
It now has a Price/Earnings ratio that exceeds that of Alphabet, if only slightly, along with a 15% higher revenue rate and, most quarters, superior operating margins. It also pays a dividend, now yielding 2.3% -- Alphabet has yet to do that.
There remain skeptics. Windows 10 can still be a beast of an upgrade, especially on a corporate system, where third-party hardware and software may not have adapted to it yet. But the Azure cloud is now a real competitor, in the corporate world, to Google’s Compute Engine, and Microsoft even has rivals copying a hardware design they laughed at a year ago, the Microsoft Surface.
While the NASDAQ collapsed by over 2% on January 4 (the day someone dropped the China), Microsoft held up pretty well, down just 1.2%. (Alphabet lost 2.4% of its value.) There is, once again a “big three” of technology, as Apple (NASDAQ:AAPL) is now worth under $600 billion, Alphabet is worth $528 billion and Microsoft has quietly risen to $443 billion.
But investors don’t buy the past. They buy future prospects. Microsoft reports earnings on January 28, and analysts are expecting earnings of 69 cents per share on revenue of $25.22 billion. That’s over $1 billion less revenue, and slightly lower earnings, than what Microsoft earned a year ago. And still Microsoft stock price rises.
Why? Mainly for two reasons.
- Analysts now see Windows as saved. Over 10% of PCs now run Windows 10, and that share should soon top the 11% using Windows XP. This is the fastest uptake for a new Windows version, exceeding that of Windows 7, which now runs on 56% of all PCs.
- Analysts now see Azure as a contender. It’s neck-and-neck with Amazon (NASDAQ:AMZN) Web Services in Windows hosting, Microsoft is a solid second in web hosting behind Apache and the weaknesses against Apache and Nginx, another open source server, are now seen as representing opportunities.
Nadella has moved his customer base to Azure, and is moving it to Windows 10. He has some solid designs, a sold gaming business, and it may have another winner in the Surface Hub, if it can get the bugs out and bring it to market.
But the point is, people now believe that will happen. They believe in Satya Nadella, as they did not believe in predecessor Steve Ballmer. (Full disclosure: you can now count me among them.) It is morning in Redmond again, and that is reflected in the stock’s value. You can now put your Microsoft stock alongside that of Alphabet and Apple without shame, and know that your growth prospects are just as good.