- After nearly 15 years of Stagnation, MSFT stock has more than tripled under his leadership in the last 4 years.
- It’s not just about Windows anymore and is a developers’ ecosystem of enormous potential.
- Natella is positioning MSFT to be a leader in Quantum computing’s future impact on the world.
- Only missing piece seems to be a mobile device and operatingsystem strategy to be re-examined.
Warren Buffett more than a few times in the past has been asked “Why hasn’t Berkshire Hathaway ever bought Microsoft?” His answer one time? “In the earlier years, it’s very clear--the answer is stupidity,” Buffett admitted.
He has clarified other times that he didn’t want his friendship with Bill Gates to give the appearance of impropriety. But now looking just recently comparing his Apple investment to his shunning of Microsoft, it appears perhaps stubbornness outshines that self-confessed characterization.
However in the 14 years under Steve Ballmer’s leadership that reluctance seems proficient at least in that particular decade and for most shareholders in this period it was an exercise in frustration and disappointment. Quarter after quarter, year after year, the stock hovered around $30 a share and analysts and pundits abound kept asking “Where is the growth?”.
Steve Ballmer, leading the charge from 2000 – 2014 had amazing enthusiasm in the face relentless competition from the likes of the Google gremlins, the Apple carts , and the Amazon online cloud juggernaut. This enthusiasm however could not lift up inspiration from the shareholder’s point of view that better days were ahead and there was even a time it was thought perhaps the company would never return to glory as source of empowerment, business infrastructure development and the old crown of tech’s general darling. In his final years, revenue began to pick up but earnings growth was anything but consistent.
The windows phone and mobile operating system is now but a shelved memory. Open source programming was rising so fast it threatened almost everything Microsoft once represented. Fortunately though the prior years saw such immense global penetration of Microsoft products in almost every corner of the globe while also successfully navigating and reaching users in current challenging and tightly regulated areas where big tech to this day is still struggling to enter or otherwise transition smoothly. This was their one saving grace and an important foundation to build upon even with decreasing market share in these key areas of their product mix while there were some bright spots emerging, but it just wasn’t enough. Despite all the pressure from competing operating systems like Linux, Android, IOS and others, Microsoft can still boast of nearly half a billion windows 10 users and a billion users total of older operating systems, or popular analytical programs like Excel are still a standard reaching 750 million users globally. Ballmer certainly had his hands full with this onslaught of changing times and rapidly evolving tech but at some point and in this case almost 15 years, it was time for a fresh face and more aggressive vision.
Enter Satya Nadella, a 20 plus year executive in Microsoft’s leadership heading the cloud division and essentially the most logical candidate to take over to bring new life to the team. In the short 4 years of his tenure, he has been a shareholder’s dream. The stock has now more than tripled since his entrance and has blown away the general market benchmarks who can only boast of a rough 30 percent in that time frame. In 2018 alone which finished in a rout across the board and where many tech leader stocks saw 20-30 percent selloffs and more in the final quarter, Microsoft finished not only as a double digit gainer in the select Dow industrial group logging over 18 percent for the year, but has so far weathered the storm of selling the last 3 months to only shed about 11 percent. After an initial drop in employee numbers from 128 thousand in 2014 to about 114 thousand in 2016, Microsoft is back to an all time employee high count of 131,000.
Microsoft 20 Years Monthly Chart Courtesy of TC2000.com Chart Courtesy of TC2000.com
The current scoreboard in the last 8 quarters show average year over year revenue growth of 15.4%, average year over year earnings growth of 7.5% and quarterly sequential growth of revenues and earnings with the exception of 2 of those 8 quarters (including the last quarter) saw upticks on average of 3.9% and 7.7% respectively.
Recent Qtr Highlights
Excerpt from Last Microsoft Earnings Call Presentation
The last year saw some extremely interesting activity. The company made a large 7.5 billion dollar acquisition in Github, a large community of developers working together to share code, develop new software and interestingly collaborate in open source development projects that in past years many would have considered to be Microsoft’s greatest threat proliferation. Natella however, having built the cloud and enterprise division for Microsoft saw this is a new frontier for Microsoft and what could turn out to be their cloud platform’s biggest driver of growth. It’s only been a few months since October’s acquisition, but all in all without detail, it sure seems like a brilliant move and one that rivals such as Amazon missed out of for their cloud future while Bezos and company were binge buying the likes of Whole foods and learning how to deliver food and medicines.
Between 2016’s 26 billion dollar acquisition of LinkedIn, and 2018’s acquisition of Github along with the share's capital growth curve experienced in the last few years, Microsoft’s ecosystem of developers’ tools, social networking platform, software products and cloud enterprise solutions and services has opened the door to many new verticals globally and Natella seems to just be getting started. New initiatives such as cultivating quantum computing coding which harnesses the power of quantum physics to computer data processing could help solve some of the world’s toughest problems. Some even theorize it will have more of an impact than Artificial intelligence if the two tech advances don’t come together as postulated here. But the rapid advances it can have on medical discoveries, energy alternatives, aerospace advancement and financial data processing or even cyber security defense is collectively by Microsoft’s own admission roughly 5 years away in their solutions and services. Microsoft is all in on this technology and they have the resources to make this a reality very soon for all our benefits.
About the only negatives we could point out as 2019 begins are relatively minor but we will mention them here.
At roughly $101.00 per share as of the time of this article, it is a little pricey at trailing 42 times earnings, and while we are cautious in the first couple weeks of the year to give stocks time to stabilize and welcome the discovery of earnings season about to start, it should not be a short term trade by any measure and the multiple reflects what may be on the horizon looking out the next several quarters which makes it a fair value for speculators looking for a good trade in 2019 and it is and should be a core holding for any investors looking past that.
Finally, while not necessarily a negative, we feel Microsoft’s abandonment of the mobile device market and mobile operating system seemed to have been a bit premature, but perhaps not too late to re-examine and we would love to see Mr. Softie re-enter this space not just from a device point of view but also as an operating system solution as well considering their current mixed balance of offerings and infrastructure as it just seems this would just be the final piece of the ecosystem puzzle. Enterprise customers, gamers and just the general retail community are always looking for the new up and coming endpoint solution in mobile and Microsoft should not be deterred by the other guys who themselves are seeing challenges perhaps simply because of limited options of diversity and also because they have overpriced and superbly built the newer products thereby reducing turnover to new offerings. At one time it was rumored Microsoft was eyeing Blackberry in the final years of their fall and that exploration looks even more attractive now considering not just BB’s turnaround from device maker to software services and security solutions (of which they are partnered with Microsoft’s Azure), but add the autonomous and connected car market penetration Blackberry is achieving. Blackberry also has a valuable patent portfolio which has enabled them to survive while completing their turnaround under John Chen, but the mobile device market seems to a crucial endpoint that has synergy with so many areas under Microsoft’s umbrella, be it the Skype division or the chance to enable the Github segment to become a real app space of mammoth proportions.
It would also be refreshing to see a mobile device not being manufactured in China of which has exposed new concerns over security and perhaps even more nefarious intentions.
Microsoft needs to have a product somewhere in their mix under the branding, the “Micro-Phone”.