Microsoft: The Story of a Great Turnaround Stock

turnaround-stock

It looks like Microsoft (NASDAQ: MSFT) might finally be showing signs of life in its turnaround efforts. The mega-cap tech company has had a stronghold on the PC operating system market for years.

Yet, growth of mobile and tablet usage is quickly outpacing PC usage. A big negative for the PC-focused Microsoft.

However, Microsoft made a splash last month by launching a Microsoft Office app for iPad. The market seemed to give the company a vote of confidence. Shares were up 3% after the announcement. That might be because this is the first time that investors have seen a move by Microsoft signifying that it’s making a meaningful push into mobile and cloud computing.

Microsoft could have developed an Office app for iPad years ago. However, it decided to try its luck with its own tablet, the Surface. That hasn’t worked out as planned. But the move to bring Microsoft Office to other devices is better late than never.

iPad users will have to pay $100 for an Office 365 subscription to be able to edit files via Microsoft Office. But Microsoft is making the full version of Office for iOS and Android smartphones available for free.

What about the Surface?

Sales of Microsoft’s Surface tablets will likely take a hit with the Office for iPad release. Because the Surface will no longer be the only way that consumers can get access to Office on a tablet.

Even still, the move is a long-term positive. It signals that Microsoft is making a renewed focus on cloud computing.

It also allows Microsoft to take advantage of the world’s most popular tablet. In 2013, the iPad was the top selling tablet, owning 36% of the tablet market share.

Think about this. During the fourth quarter, Apple sold 26 million iPads. Meanwhile, Microsoft Surface brought in $893 million in sales during the fourth quarter. Even if every Surface that Microsoft sold was at the cheapest price point ($349), that would have only been 2.5 million units. iPads are outselling Surface tablets at a 10-to-1 ratio.

And for all of 2013, there were 74 million iPads sold. Assuming only 25% of those users decide to pay for Office 365, that’s still a $1.85 billion incremental increase in licensing revenue for Microsoft. Not to mention the fact that it’s a recurring revenue stream. A subscription to Office 365 is $100 annually.

And even though the iPad app will cannibalize some of the Surface sales, the licensing revenues are higher-margin. It’s a great first step for this turnaround stock.

But how do you turn around a mega tech company?

Turnarounds by big tech names are possible. Think about Hewlett-Packard (NASDAQ: HPQ), which was trading at less than $13 a share just under 18 months ago. It’s since doubled its stock price. Apple traded at less than $5 a share in the late 90s, before Microsoft invested $150 million in the company. The rest has been history.

While it’s tough to turnaround a multi-billion tech company, with Satya Nadella taking over for Steve Ballmer as CEO just over a month ago, things have already taken a turn for the better. Moving away from PCs is a necessary evil. Windows for PC is still Microsoft’s cash cow, but the shift from PC usage to mobile and tablet will only increase over the next few years. In 2013 alone, PC shipments were down 10%.

Enterprise has always been a key market for Microsoft. Its Office 365 is a testament to this, which primarily caters to businesses.

Microsoft just has to figure out how to bring a better cloud experience to the enterprise customer. That’s right in Nadella’s wheelhouse. Nadella ran the cloud business at Microsoft before taking over as CEO.

The company’s first step is to offer a seamless and similar experience for Office 365 no matter the device. The Office for iPad app is a great way to reintroduce Office back into the lives of those that thought they could live without it.

The turnaround story doesn’t stop there, however. It’ll require a greater push to the cloud, which includes bringing Office to Android tablets. Only time will tell how the story of this turnaround stock will play out. Keep in mind that this turnaround stock also pays a 2.7% dividend yield.

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Published by Wyatt Investment Research at