Microsoft Corporation (NASDAQ:MSFT) stock released its first earnings report since the announcement of its agreement to buy LinkedIn Corp (NYSE:LNKD) and investors seem to be impressed. On the next morning, Microsoft stock surged more than five percent.
The best part is that this could be the start of the next big rally for the tech giant.
Microsoft stock might not be as hot as some of the newcomers in the Internet business, but it has always had its following. The company runs an established business, has wide economic moats, and pays solid quarterly dividends. If you add in the growth potential it just showed, MSFT stock should have no problem making new highs.
Cloud Business Booming
One thing facing all technology companies today is the fast-changing nature of the industry. In the past several years, many tech companies became obsolete when people shifted to mobile and cloud. Microsoft, despite being four decades old and commanding a more than $400 billion market cap, is still pretty nimble when it comes to adapting to new trends. That’s why it’s still around—and still growing.
Since Satya Nadella took the helm as chief executive officer, Microsoft has been pursuing a mobile-first, cloud-first strategy. This earnings report is the latest sign of progress.
In the fourth quarter of the company’s fiscal 2016 (ended June 30, 2016), revenue from Microsoft “Azure” grew 102% year-over-year. On a constant currency basis, Azure revenue would have been up 108%. Azure’s usage also more than doubled compared to the year-ago period. (Source: “Earnings Release FY16 Q4,” Microsoft Corporation, July 19, 2016.)
Azure is Microsoft’s enterprise-grade cloud computing platform. According to CEO Satya Nadella, customers choose Azure for three reasons: “They want a cloud provider that offers solutions that reflect the realities of today’s world and their enterprise-grade needs. They want higher level services to drive digital transformation, and they want a cloud open to developers of all types.” (Source: “Microsoft Satya Nadella on Q4 2016 Results – Earnings Call Transcript,” Seeking Alpha, July 19, 2016.)
New Strategy for Old Products
If you are reading this article, chances are you are using Microsoft’s “Windows” operating system and are familiar with the “Office” productivity suite—maybe you’re using it right now. Even though these two products have been around for decades, the roles each plays now are quite different from the roles the OS and software first filled.
Previously, you would go to the store and get Windows and Office in CD format (maybe even in floppy disc format!). You would pay for them, go home, and install them on your computer. Today, both are delivered through the cloud. Microsoft even made its latest operating system, “Windows 10,” free for one year.
What this means is that instead of selling users a piece of software, Microsoft is adding users to its cloud-based ecosystem. In this day and age, user growth is the priority at almost every Internet company. Just take a look at the number of times the term “monthly active users” (MAUs) appears in Internet companies’ earnings reports and you’ll see what I mean.
The idea is that if a company has a large enough userbase, it can find all kinds of monetizing opportunities. Although Windows is free, there are plenty of ways for Microsoft to make money from it. Subscriptions to Office and other paid software at the Windows store is just one way. By knowing its users through online accounts (rather than through one-time sales of software on CDs), Microsoft can also more easily market its future products and services.
Has this plan been working for Microsoft so far? Most definitely it has. Windows 10 is now on more than 350 million monthly active devices, while Office consumer products and cloud services revenue grew 19% year-over-year in the quarter and Office 365 commercial revenue surged 54%.
The Bottom Line on MSFT Stock
Don’t forget that despite having startup-like growth, Microsoft is not really a startup. It’s a $400-billion company with a 2.6% dividend yield. Whether you are an income investor or a growth investor, Microsoft stock is worth a serious look.