Under Nadella, Microsoft Is Finding Its Mojo

Microsoft's first quarterly earnings under new CEO Satya Nadella are very encouraging.

Apr 24, 2014 at 8:24PM

U.S. stocks got back to their winning ways on Thursday, as the benchmark S&P 500 gained 0.2%, while the narrower Dow Jones Industrial Average (DJINDICES:^DJI) was unchanged. Apple's (NASDAQ:AAPL) performance today partially explains the discrepancy (Apple isn't a Dow component), as the stock rose 8.2% on better-than-expected results, and an augmented capital return program. That equates to nearly $40 billion tacked on to Apple's market value, putting it above the $500 billion mark. Apple's rise also contributed to a 0.5% gain in the technology-heavy Nasdaq Composite Index (NASDAQINDEX:^IXIC), which has now clawed its way back to within 5% of its March 5 high. However, the focus this evening is two other technology heavyweights, Microsoft (NASDAQ:MSFT) and Amazon.com, which reported quarterly results after the closing bell.

Although analysts and financial journalists thought the current earnings season would be a stern test for companies -- and, by extension, the stock market --- Microsoft followed Apple in passing with flying colors. Their results provide a healthy tailwind as the major indexes appear to be on their way back up to their recent highs; after all, the two companies' combined market value is now almost $840 billion.


This was Satya Nadella's first quarterly-earnings report as Microsoft's new CEO, and his message on today's earnings conference call is clear: In the face of a dramatic shift toward mobile devices, Microsoft is no longer content to milk its traditional Windows and Office franchises. Microsoft must evolve, and the new watchwords are "mobile first, cloud first" ("cloud" refers to services that users access via the web], an expression Mr. Nadella repeated at least three times during the call. That means migrating Office users toward the web-based version, Office 365 (which operates on a subscription model), for example, or working with non-Microsoft devices such as the iPad.

On the numbers: Microsoft's $20.4 billion in revenue was essentially flat year on year, and in line with Wall Street's expectations. Earnings per share of $0.68 fell nearly 6% year on year, but, crucially, they were 8% above analysts' consensus estimate.

Devices and consumer revenue rose 12% (I was surprised to learn that the Surface tablet did a half-billion dollars in revenue); meanwhile commercial revenue -- the heart of Microsoft's fortress -- gained 7%, with Office 365 revenue more than doubling.

During the call, Mr. Nadella summed up the quarter with two words: execution and transition. Normally, I'd ignore this type of lingo from a chief executive; but, in this case, Nadella appears to be genuinely driving both of these. I've been very impressed with him in the short time since he has taken on the top role. He brings a fresh approach and energy to Microsoft that is in sharp contrast to his predecessor, Steve Ballmer.

In after-hours trading, Microsoft's stock was not much below its April 1 high. Valued at just 14.5 times next 12 months' earnings-per-share estimate as of today's close (that's less than the market's multiple), the stock looks reasonably well-positioned to deliver market-beating returns during the next several years.

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Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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