We’re coming up on the fifth anniversary of a bold contrarian call I made that has paid off handsomely.
At the time, a lot of folks thought I was crazy to back this giant tech laggard.
I can see why. No doubt, the firm seemed hopelessly mired in the past.
And its sideways stock movement seemed to confirm the “conventional wisdom” that the burgeoning digital economy had left it in the dust.
Here’s the thing. I call them the way I see them, even if that means going against the grain of investor sentiment – or recommending a company I once despised.
So, for me to suggest in this column that folks buy the stock meant I had to be absolutely convinced that big change was at hand, and so was big money.
Had you bought the former laggard when I first suggested doing so on June 30, 2014, you’d have made 211.5%, beating the S&P 500 by 323%.
But don’t worry. Today, I’m going to show you why there’s still plenty of upside ahead…
A Fresh Look
Five years ago, you’d have been hard pressed to find a bigger Microsoft Corp. (Nasdaq:MSFT) basher than me. I was down on the company for three reasons:
- I’m a long time Apple Inc. (Nasdaq:AAPL) fan. I own tons of their gear and love the operating system.
- Former CEO Steve Ballmer just didn’t have the chops to put the company back in the fast lane.
- The stock had been a dog for at least a decade.
In fact, in the summer of 2013, I wrote a scathing review of the company in these pages.
But when Satya Nadella became CEO in February 2014, I took a fresh look – and I liked what I saw.
Pushing the Cloud
When Nadella took control of this software giant, he was deeply rooted in Microsoft’s history. But he was also a visionary change agent.
It became clear very quickly that he had shored up the support and morale of Microsoft’s roughly 100,000 workers.
Yes, he understood the importance of supporting the firm’s strong legacy franchises, such as operating systems, Office software and database-server management.
But he also pushed his firm to boldly embrace the cloud.
Until then, cloud computing was pretty much a one-horse race, dominated by mighty Amazon.com Inc. (Nasdaq:AMZN). Back then, Microsoft posted less than $100 million in yearly sales in cloud computing.
Today, Microsoft is generating $10 billion in intelligent cloud revenues – per quarter. The success here is no accident.
Prior to becoming CEO, Nadella was an executive vice president of Microsoft’s Cloud and Enterprise group. Clearly, he knew how to deploy his cloud industry insights into a robust growth platform.
Make no mistake, every dollar of cloud-related sales carries high profit margins. In fact, this fast-growing segment of Microsoft’s business is a key factor behind a five percentage point increase in profit margins over the past four years, to around 41%.
Room for Growth
And Microsoft isn’t just seeing momentum in the cloud. This past quarter it showed across-the-board strength, in areas such as Office 365 upgrades, an Xbox gaming platform, email and database server management.
That helped bring in $30.6 billion in sales this past quarter, $700 million ahead of forecasts. And per share profits of $1.14 were 14% ahead of estimates.
The results set the stage for Microsoft’s sales to grow nearly 15% this year, and profits to rise at a 20% pace.
Five years ago, I was one of the very few people that thought Nadella could revitalize this software giant. His handiwork is now quite obvious to many more investors.
And don’t look for Microsoft to slow down any time soon, as the firm faces a lot of catalysts. These include:
- An end to support for Windows 7 by the end of this year, which should further drive adoption of Windows 10.
- Support for the 2008 Windows/SQL server software that will expire this year, and that will also trigger an upgrade to newer versions.
- And Office 365 upgrades should be steady for many quarters to come as the firm’s support of Office 2010 expires in October 2020.
While the firm can still squeeze a lot of sales and profits out of all of those legacy units, Nadella has also been pushing his staff to dominate a range of newer, emerging tech trends.
For example, Microsoft’s stunning new HoloLens technology pairs the best of Virtual Reality (VR) and Augmented Reality (AR) into a field known as Mixed Reality. It’s been getting rave reviews from early adopters and should be a major growth driver in the next few years.
As I see it, HoloLens could emerge as the hottest collaboration tool of the coming years, providing a chance to hold virtual face-to-face meetings with people that are halfway around the world. It also should have great appeal with consumers.
And Microsoft has staked early stage tech leadership in areas such as blockchain technology, with its strong support for Ethereum (ETH).
And the firm’s software is now playing a central role in the fast-growing cannabis industry.
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A $1 Trillion Valuation Earned
Microsoft worked very hard to attain a $1 trillion market value, and nearly double its value to investors.
Yet I see an even greater level of value being created in the next few years. Based on its earnings record over the past three years, I’m projecting 60% gains for the stock over the next three years.
By the numbers, it actually could double in four years, but I like to be conservative.
Simply put, Microsoft has emerged as a great foundational play that you would be well rewarded to have in your portfolio.
Cheers and good investing,
Michael A. Robinson