Time to Take Profits on MSFT Stock?
After a few years of being trading range-bound, Microsoft Corporation (NASDAQ:MSFT) stock seems to be back on track. In the last year, MSFT stock is up about 30% and up nearly 50% since Satya Nadella took over as CEO nearly two years ago.
So what’s changed?
When Steve Ballmer took the reins from Bill Gates and became the CEO of Microsoft in January 2000, the company was the king of the tech industry. However, over the next 13 years, the industry rapidly changed, while Microsoft became complacent. In that time, the Internet bubble burst, touchscreen mobile phones and tablets became ubiquitous, Google took over Internet searches, and Facebook became a place where millions socialize online.
As technology became increasingly mobile, Microsoft failed to move beyond its reliance on the personal computer (PC) and that came back to bite it big-time. When Ballmer became CEO, Microsoft had a market value of about $600 billion. (Source: “Microsoft’s stock slumped under Ballmer,” Yahoo! Finance, August 26, 2013.) By the time Ballmer stepped down, Microsoft’s value was sliced by more than half to about $230 billion.
But under Nadella, MSFT stock has found new life. Since the start of his tenure, Nadella has transitioned Microsoft beyond its PC roots. Namely, he has moved the company’s software to the cloud, which is starting to pay off big.
One standout is the company’s “Office” product suite. Nadella moved the company’s flagship software to the cloud on a subscription model where customers pay a monthly fee instead of paying for a one-time license every couple of years. Called “Office 365,” the cloud portion of Office is becoming a boon for MSFT stock.
In a note to clients, Bernstein analyst Mark Moerdler says he is upbeat about Office 365 and believes that the future looks bright for Microsoft because of the product. Moerdler has an “Outperform” rating and a price target of $67.00 on Microsoft stock. (Source: “Microsoft Office Shines in the Cloud, Azure Will Be Profitable, Says Bernstein,” Barron’s, April 8, 2016.)
Moerdler forecasts that the cloud version of Office 365 had annual sales trending to $6.5 billion in the most recent quarter. (Source: Ibid.) That’s out of total commercial cloud revenue that Microsoft reported at being $9.4 billion in annualized sales. (Source: “Earnings Release FY16 Q2,” Microsoft Corporation, January 28, 2016.)
At roughly 70% of cloud sales, it doesn’t sound like there is much more room left for Office 365 to grow, but that’s not the case at all. Office 365 is experiencing explosive growth. Revenue in the latest quarter for the service jumped nearly 70% in constant currency and it now boasts 20.6 million subscribers. (Source: Ibid.) That’s more than double from the same period a year ago.
As impressive as Office 365 sales are, that’s not the only cloud product that Microsoft has going for it.
In the battle for cloud computing services, Amazon.com, Inc.’s (NASDAQ:AMZN) “Amazon Web Services” (AWS) leads the market with a dominant 30% share. But that might be about to change, as Microsoft has AWS in its targets.
Microsoft’s “Azure” cloud computing service is second to AWS with about 10% of the market, but the service is becoming bigger and bigger and it’s bound to erode Amazon’s lead in the market. According to Market Realist, Azure’s sales grew 124%, almost double AWS’s growth rate of 63%. (Source: “How Microsoft’s Azure Is Giving Stiff Competition to Amazon’s AWS,” Yahoo! Finance, April 8, 2016.) In the latest quarter, Microsoft reported that Azure’s annual run rate was 140% in constant currency, while premium services nearly tripled over the last year.
The Bottom Line on MSFT Stock
Microsoft hasn’t broken down specific costs for Azure, but Moerdler believes that the service is in negative gross margin territory as the company is investing a lot in it to beef it up for the future. (Source: Barron’s, op cit.) On the plus side, Moerdler says Azure will eventually become very profitable for Microsoft. He also estimates that Azure’s annual run rate sales in the latest quarter were $1.8 billion. (Source: Ibid.)
Microsoft’s growth story is far from over. With the company’s cloud services taking off, investors might want to take a look at MSFT stock.