Microsoft Corporation (NASDAQ:MSFT) just scored a massive win and no one even noticed. The company just signed a major deal with one of the world’s biggest companies, opening up a whole new dimension to MSFT stock.
The company signed a deal with International Business Machines Corp. (NYSE:IBM). The tech vendor agreed to sell Microsoft’s software and hardware to its enterprise clients. It will also help Microsoft build new financial software apps.
But here’s the best part: IBM signed the deal because customers were requesting Microsoft’s products. Apparently, IBM’s clients weren’t satisfied with the selection they were getting from Apple, so they asked for a more professional option. (Source: “Microsoft just made a deal with IBM — and Apple should be nervous,” Business Insider, July 12, 2016.)
Apple has a similar deal worked out with IBM. However, Apple’s library of apps is light on business-centric apps. This deal positions Microsoft to poach Apple’s market share, while also sending MSFT stock’s hardware sales through the roof.
The Epic Turnaround of MSFT Stock
After all, IBM is the ultimate IT service provider. It has deep roots in global commerce with corporate partnerships across the world, from New York to Hong Kong. The company’s client list could seriously boost Microsoft’s earning potential in the coming years.
The move could also encourage more companies to shift their corporate workloads onto “Azure,” Microsoft’s cloud-based platform. It’s estimated that only five percent to 10% of the world’s businesses have made this shift, leaving $1.2 trillion up for grabs.
Now Microsoft can tap into a wider slice of those revenues. What’s interesting is how the company found its way to this position. Just five years ago, investors viewed MSFT stock with a certain amount of disdain. It was considered borderline toxic.
Microsoft was the 800-pound gorilla in the software space for more than 30 years. It developed programs for businesses and individuals alike. But all of that software was closed to outside developers—the company held its secrets close.
For those first decades, the strategy of secrecy worked fairly well. When Bill Gates left Microsoft in 2000, he left the company with a $600-billion market cap. His board of directors then appointed Steve Ballmer as his replacement (big mistake!). (Source: “Microsoft Will Serve You Now,” Fortune, June 15, 2016.)
By the end of Ballmer’s tenure in 2014, he had chopped that market cap down to $270 billion. It was a disastrous run that cost MSFT stock its value, momentum, and goodwill.
With the Nokia deal still in the rearview mirror, investors wrote off Microsoft stock as a relic that had failed to keep pace with 21st-century technological developments. I don’t blame those investors; that’s certainly what it looked like.
But then something strange happened…
As Ballmer left the company (good riddance!), Microsoft began to turn around. It gained a competent CEO in Satya Nadella, dove headfirst into a new business, and underwent a massive restructuring to dissolve its internal politics.
Rather than dividing the staff by product, Microsoft regrouped its workforce by purpose. If you’re developing artificial intelligence, should it really matter whether you’re on the “HoloLens” team or “Cortana” team? It seems an idiotic way of doing things.
This restructuring was the first in a long line of steps Microsoft took to rebuild its greatness.
Next, managers actually sat down and tried to use the company’s products. It made them realize how unintuitive most of the programs were, so they fixed them.
The Bottom Line on MSFT Stock
Clearly, that approach paid off. Microsoft now holds 10% of the cloud computing market, and it’s only getting bigger. Not to mention that the “Surface” notebooks were heralded as a masterpiece by critics and customers alike—so much so that IBM had to have them.
MSFT stock’s price outlook just jumped significantly from the company’s partnership with IBM, yet the share price hasn’t fully adjusted yet. I’m optimistic that the market will absorb this news in the coming quarters, leading to massive gains for Microsoft stock.