There was a decade or so, after the dot-com bust, when investors could have been forgiven for thinking that Microsoft (NASDAQ:MSFT) had lost its mojo, and was doomed to trade sideways as the tech world evolved past it. But that is not the Microsoft that reported earnings following the market close last Wednesday. Thanks in large measure to the power of Azure, Windows, and Office as recurring-revenue machines, the company continues to blaze forward, and briefly topped the $1 trillion market cap level.
In this segment from MarketFoolery, host Chris Hill and Motley Fool Director of Small-Cap Research Bill Mann talk about the ways the company turned itself around, what it's doing right today, and the core businesses that have long been churning out cash.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on April 25, 2019.
Chris Hill: Microsoft shares are hitting a new all-time high. Strong third-quarter report. Briefly this morning, shares were up enough that Microsoft crossed the magical $1 trillion market cap mark. It's come a little bit below that. This was another great quarter. For all the talking we do about Amazon Web Services, let's take a moment and talk about Microsoft's cloud. Azure is crushing it.
Bill Mann: I'm so glad that you brought that up, and brought it up in the context of Amazon. First of all, by the way, yeah, congratulations to Microsoft joining Club Trillion, at least for a while. It has a membership of one, now back to zero. A lot of people think of AWS and Amazon Prime as being among the most powerful, valuable business franchises, recurring-revenue models in the history of mankind. But Azure and, really shockingly, Microsoft Windows and Office, I think are even more valuable in terms of being a recurring-revenue model. They weren't for a long time. It was, you'd get a computer, it came bundled in it. But they've done an amazing job at Microsoft, turning themselves into an automatic recurring-revenue model. The only reason at this point that you're going to leave Amazon is, I don't know, if you die? You go out of business, merge, whatever it is. You remember, the theme for years around Microsoft was, "Oh, poor Microsoft! They're getting crushed by Apple. They're getting crushed by Google." It's not like Microsoft this entire time was the Zune, or the PC. They've really turned themselves around, and a lot of really smart investors weren't paying attention to it.
Hill: Yeah. And even those years when Microsoft was not really buzzworthy, the for lack of a better term, because they would try and come up with these things like the Zune -- and certainly the Surface tablet. The early versions of that were not as great as they are now. But even then, when they didn't really have the buzz factor, when Steve Ballmer was running the company and they were just floundering, it was still a company that was turning out a lot of cash, to go back to what you were saying, because of those franchises, because of those recurring-revenue streams they had.
Mann: The first person who tipped me off to this was former Fool analyst Matt Richie. He said, "Look at the cash that they're generating." Because it wasn't a tremendous growth model at the time, people just ignored it. The interesting thing to me about Microsoft and this quarter's results is, all three of their major segments are just crushing it. They generated $30 billion in revenues, up 14%, in areas that you just wouldn't even think have that type of growth left in them. Those are fantastic, huge numbers for Microsoft.
Hill: Satya Nadella would not accept the credit if you were to give him all of the credit. But holy cow! [laughs] The transformation of this business under his leadership has been incredible. And by the way, every now and then we take a victory lap on this show. There are CEOs on conference calls, every now and then, they take a victory lap. He could have taken a victory lap. No. There's no chest-beating, no jersey-popping with Satya Nadella.
Mann: Just, "Here's our conference call." "What do you have?" "We killed it." [laughs]
Hill: He's the embodiment of the servant leader.
Mann: Embodiment is right. I actually think much more highly of Steve Ballmer's leadership than I think he's given credit for. He took the reins from the true founder of the company. Things were going OK in various places under the surface, at a time in which Microsoft's bread and butter, which was PC sales, were first starting to tank. But, yeah, embodiment is the exact right word. He's calm, he's impressive, and I think that people no longer view Microsoft is this sweaty, slightly overweight mess. Which is harsh, but is probably true.