Microsoft flying high on wings of Cloud business

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Over the last few years Microsoft (MSFT) has dramatically changed direction as a company to generate new sources of revenue and in doing so altered consumer perception of the brand and impressed a number of Wall Street analysts who are eagerly awaiting the company’s quarterly earnings report (October 26) which they hope will confirm their selection as their top large cap pick. 

As the above chart indicates that the recent rally to $78 has carried Microsoft stock into a technically overbought situation. The last similar signal was in June ahead of a pullback from $72 to $68 that occurred in roughly a week. Microsoft shares tend to trade lower ahead of their earnings as traders look to lock-in profits on gains ahead of the volatility caused by the company’s earnings report.

Under CEO Satya Nadella the company is now well-placed to enjoy a period of sustained growth with growing revenue derived from its Cloud offering (which is well on target to reach the $20 billion annually predicted by Nadella by 2018) and increased revenues from new ventures as well as revitalization of revenue from its existing portfolio of products.

Former CEO Steve Ballmer took the initial decision to move into Cloud services and turn Office into a subscription based product. However, when Nadella picked up the baton in February 2014, he ditched many of the business practices that had been in place when the company dominated the marketplace with its Windows operating system.

Back when Microsoft lead the PC market it sold copies of Office or parts of it (Word, Excel, PowerPoint etc.) to run on them, but then smartphones and tablets ate away at its market by giving users computing power in the palm of their hands which also created a perception that the PC giant was now behind the curve.

By selling Office on a subscription basis, Microsoft now has a recurring revenue with a much lower entry point for its customers ($69.99 as opposed to a one-off payment of $300). When combined with its Cloud services, which are also sold on a monthly subscription, Microsoft now enjoys impressive perpetual revenue.

The perception of Microsoft as a lumbering dinosaur facing extinction at the hands of Apple et al. has faded as it has weaned itself off its dependency on the shrinking Windows market.

Microsoft has also expanded its range of projects to include HoloLens (which undercuts by half the price of Facebook’s Oculus Rift) and LinkedIn (which gives it a significant presence in social media) to re-stake its claim as a brand that will power the future.

Microsoft has been quick to realise that its attempts in the smartphone market were failures, but instead of mirroring its behaviour in the PC market, it downsized its mobile business and focused on launching more apps for iOS and Android which allows PC users to access Office, Outlook, OneDrive and other services on smartphones which maintained their relevance.

 

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