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Microsoft Stock: Why It’s Back in a Big Way

Patient shareholders have finally been rewarded for holding Microsoft (NASDAQ: MSFT).

After years of wandering in the stock market “desert,” Microsoft stock is once again at an all-time high. This is the first time Microsoft stock has hit a new high since the dot-com bubble in 1999; it has quadrupled since the 2009 low.

Microsoft’s stock had gone nowhere during the tenure of Steve Ballmer. The perception was that it was lagging badly behind in both mobile and the cloud. And bad deals, such as the Nokia phone deal, added to the tarnishing of the company.

The final surge above the previous all-time high followed the release of Microsoft’s first fiscal quarter numbers, which were above Wall Street forecasts.

Adjusted revenues climbed 3% to $22.3 billion, above expectations of$21.7 billion. Pro-forma earnings rose 6 cents to 65 cents, ahead of the expected 68 cents per share.

A Transformation Takes Shape

The recent outperformance of Microsoft stock is largely due to the transformation of the company since Satya Nadella became CEO in February 2014.

His main focus has been to shift Microsoft more and more to the cloud. Before becoming CEO, Nadella was responsible for building MSFT’s cloud business, Azure.

In the latest Microsoft results, sales of the Azure service more than doubled. Azure clocked revenue growth of 116%. That was up substantially from the previous quarter’s 102% growth. Microsoft also reported a 7% rise in the profit margin in its commercial cloud.

Adding to the huge boost from the cloud, Microsoft’s other divisions also did well.

Its Productivity and Business Processes division revenues improved 6% to $6.7 billion. That was largely thanks to the continued movement of Office customers to the cloud. Revenue from the Office 365 service soared 51% from a year earlier.

Revenues from the More Personal Computing division fell by a less-than-expected 2%.

Nadella’s Strategies Are Working

This latest batch of results from Microsoft seemed to vindicate Nadella’s “hybrid cloud” strategy. This is targeted at customers that still want to maintain their own data centers, while they move part of their workload to the cloud.

Thanks to the strategy’s success, Azure alone is now forecast to generate revenues of at least $20 billion by 2018.

Luckily for shareholders, Nadella is not sitting on his laurels . . . although is the acquisition of LinkedIn is still very questionable, in my view.

I do like that Nadella is still pushing hard to move Microsoft into other fast-growth areas.

One area is artificial intelligence, which Nadella believes will be a cornerstone in drawing more customers to its cloud services.

Another area is augmented reality, with its Windows Holographic effort that includes the HoloLens. This involves mixed reality, where users can still see the real world but with computer-generated 3D objects displayed in front of them.

Some even think Microsoft’s latest effort puts in ahead in the augmented reality and virtual reality race with both Facebook (NASDAQ: FB) and Alphabet (NASDAQ: GOOG).

Microsoft Stock: Its Future Is in the Cloud

Hopefully, these ventures work out well for Microsoft.

But even if it doesn’t, the company can always fall back on its blossoming cloud business.

Microsoft sits No. 2 in selling computing power and data storage on demand over the internet, which is known as infrastructure as a service (IaaS).

Microsoft’s 11% market share trails only Amazon Web Services from Amazon.com (NASDAQ: AMZN), which leads the way with a 31% market share.

I fully expect this gap to narrow in the years ahead.

A Morgan Stanley survey of organization a few months ago showed that 31% expected to be using Azure services by 2019 versus 30% for AWS. The current usage figures are 12% for Azure and 21% for AWS.

Many of the companies planning to move to Azure likely have existing on premises data centers built on Microsoft’s server software stack.

Another survey from JPMorgan of distributors found that 56% of respondents mentioned Azure positively, while only 37% mentioned AWS positively.

In both surveys, Google was almost an afterthought.

Natella’s idea that customers want a vertically integrated approach – from storage to software such as Dynamics 365 to business application like Office 365 – is looking prescient.

If the current momentum continues, it’s more good news for shareholders of Microsoft stock and bad news for its competitors’ shareholders.

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