How Microsoft Corporation Stock Sets Itself Apart From the Cloud Crowd

While Apple Inc. (NASDAQ:AAPL), Alphabet Inc. (NASDAQ:GOOG, NASDAQ:GOOGL), Amazon.com, Inc. (NASDAQ:AMZN) and Facebook Inc. (NASDAQ:FB) are increasingly consumer oriented, Microsoft Corporation (NASDAQ:MSFT) has charted a different Cloud Czar strategy under CEO Satya Nadella. Microsoft stock is bound to grow as the enterprise cloud.

It’s ironic, because Microsoft under founder Bill Gates was mostly a consumer-facing company. Windows and Office were designed for personal use. Its early internet efforts were entirely consumer-facing, its initials still on Comcast Corporation’s (NASDAQ:CMCSA) MSNBC channel.

But Nadella has determined that Microsoft’s future is to be more like what International Business Machines Corp. (NYSE:IBM) was, before Gates’ Windows knocked IBM’s OS/2 out of the operating system race almost three decades ago. Microsoft Azure is focused on big projects, for big clients, on keeping big business and big government running smoothly.

Microsoft Stock and the Nadella Vision

Until recently, the differentiation didn’t matter much. All the Cloud Czars remain strong, still building over half the “hyperscale” data centers among them.

But the North American market, where half of these data centers are located, is looking increasingly built-out. The big growth will come from international business.

Microsoft is the best-positioned of all the Cloud Czars for this business. It presently has nearly three-dozen data centers and, when its two in South Africa are complete will have clouds on every continent. This includes three centers in India, two in mainland China and (soon) four in Australia. Only one-third are in the U.S.

This means Microsoft can let clients target specific geographic regions, migrate all their enterprise systems into Azure and provide government a truly “hybrid” cloud, where some workloads are run locally and others remotely.

The hardware work is being off-loaded into an alliance with China’s Xiaomi, guaranteeing that whatever it chooses to make will be cost-competitive, and maximize profits from its brand. The hardware-light model means it can finally start taking back some of the education market share it lost to Google’s Android earlier in the decade.

Nadella’s Microsoft aims to have the steadiest business, the lowest profile and the least controversy among the Cloud Czars, as all five enter an era where they have targets on their backs over issues of content, anti-trust and government control.

What This Means

The long runway and steady rental income from Microsoft-hosted software and enterprise data applications make reading its financial reports a joy.

For the fourth quarter of 2017 Microsoft achieved 12% top-line growth over the year-earlier period and brought about 30% of that to the operating earnings line. Total profits were skewed by the board’s decision to take charges against the Trump tax cut, but it was still able to increase the dividend to 42-cents-per-share and account for it with earnings twice-over.

Microsoft now has a cash hoard of over $142 billion, it generated nearly $40 billion in operating cash flows last year, and that figure has been rising steadily. It’s the stability of the business model that stands out. Seasonality is being reduced, and the financial ship is on a steady course.

This is what you want to see, why people like Joseph Hargett and Jim Cramer love the stock; it’s also why I put some of my retirement money into it. It is, as Chris Fraley writes, reliable, and if you think it is expensive, please note that the price-to-earnings ratio is just slightly higher than that of Walmart Inc (NYSE:WMT).

You can argue that the whole market is overpriced right now, and thus Microsoft’s valuation is stretched, too. But when the hammer comes down, when the stupidity of handing cash to billionaires and starting trade wars on a whim takes the U.S. economy down, Microsoft will keep humming along.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in MSFT and AMZN.

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