Good News for Microsoft Stock
As Microsoft Corporation (NASDAQ:MSFT) discovered last week, nothing breeds envy quite like success. Alphabet Inc (NASDAQ:GOOG)—also known as Google—and Amazon.com, Inc. (NASDAQ:AMZN) are copying the firm’s playbook for taking over the cloud computing industry, which in turn has made me super-bullish on Microsoft stock (MSFT).
After all, imitation is the sincerest form of flattery. Amazon and Google are basically admitting that Microsoft has an advantage over them. This should be big news, but too many investors are blinded by Amazon’s past dominance in the cloud computing market. (Source: “Why Amazon and Google Need to Challenge Microsoft on Corporate Servers,” Fortune, September 21, 2016.)
There’s no denying that Amazon has been the undisputed “king of cloud computing” for a long time. It was far and away the market leader on Gartner Inc’s (NYSE:IT) list every year since … well, as far back as the list has existed I think.
But Amazon won that lead by building a “public cloud.” Here’s what that means: Amazon builds a data center, then rents out space on those servers to other companies. Those businesses use Amazon’s services without having any of the servers in their offices. It has been a cash cow.
Amazon made a ton of money through the public cloud but they couldn’t really make a dent in the corporate market. That’s where Microsoft decided to gain its advantage. The company is offering clients part public cloud and part “private cloud,” meaning they get to host some equipment at local sites.
From my vantage point, MSFT stock had become one of the most interesting plays in the entire cloud computing market. I really liked the angle that Microsoft stock gives retail investors for this market, and it seems I’m not alone: Amazon and Google are clearly thinking the same thing.
Both are trying to mimic Microsoft’s strategy because they realize it could drive huge gains in MSFT stock. If this sounds confusing, don’t worry, I’m about to explain why these private clouds are the biggest tailwind for Microsoft stock.
What This Means for MSFT Stock
Just think of how many companies use “Microsoft Office.” That number stretches beyond count. “Word,” “Excel,” and “PowerPoint” are fixtures in almost every business in the world. It doesn’t matter whether you’re in New York or Nairobi; the basic tools of a business are usually centered around Microsoft’s products. These “business tools” laid the foundation of MSFT stock.
But that was decades ago.
Microsoft stock needed a new tailwind to drive its growth. Ex-CEO Steve Ballmer thought it made sense to compete with Apple Inc. (NASDAQ:AAPL) and Samsung in the smartphone market, so he bought Nokia Corp (ADR) (NYSE:NOK). That proved to be a giant waste of time and money because it strayed from Microsoft’s business tools strategy. Ballmer later resigned and bought himself a basketball team (the LA Clippers, in case you’re wondering).
The current CEO, Satya Nadella, seems to understand what made Microsoft stock successful in the first place. He saw Amazon selling the public cloud and decided to go another route. The cheapness of a public cloud might appeal to a price-conscious Joe from Nebraska, but big corporations are more concerned with security. They want some servers onsite because their data is worth millions, if not billions, of dollars.
In other words, they want a mix of public clouds and private clouds.
By offering this mix, Microsoft has carved out a huge chunk of the cloud computing market for itself. It’s a direct continuation of the business tools strategy. Plus we already know it is working. If it wasn’t, Amazon and Google wouldn’t be scrambling to put together private cloud offerings.
They realized that’s how to score the big money. Microsoft already figured that out, which is why the company can afford to buy back $40.0 billion of MSFT stock. That’s almost 10% of the outstanding shares. It means that management thinks they are getting Microsoft stock at a steal, because the price is about to explode.