One particular aspect of the outage caused by a CrowdStrike software update is that it didn't affect software running on Linux or Apple's Mac OS operating systems. Instead, the software impacted by the service interruption was produced by Microsoft (MSFT 0.64%). That could affect perceptions about the software giant.
Even though it has directed investors to focus on its cloud and artificial intelligence (AI) products, Microsoft's Windows OS runs a large percentage of the world's IT infrastructure. Moreover, longtime observers may remember the 1990s and 2000s when various versions of Windows dealt with quality issues and poor security.
Early indications and CrowdStrike's own admission indicate this particular problem lies with the cybersecurity company and not Microsoft. But should investors rethink the investment case for Microsoft stock?
NASDAQ: MSFT
Key Data Points
Microsoft and its operating system
Admittedly, the proliferation of smartphones following the launch of Apple's iPhone had a detrimental effect on Microsoft. It attempted to develop its failed smartphone OS years ago but by then, Apple's iOS and Alphabet's Android had come to dominate the market.
Microsoft kept its focus on the cloud and became the second-largest cloud company behind Amazon. Although investors lost interest years ago, Windows has remained a major source of revenue for Microsoft.
In the third quarter of fiscal 2024 (ended March 31), more personal computing, the segment that runs the Windows part of the business, made up $16 billion of the company's $62 billion in quarterly revenue. Also, Windows revenue grew 11% over the previous year.
Effects on Microsoft
In total, the CrowdStrike outage affected more than 8.5 million Microsoft devices. While the news reports have shown the magnitude of the issue, it impacted less than 1% of all Windows machines.
However, Microsoft stock is up by nearly 20% so far this year and hasn't moved significantly since the outage. That's a strong indication that few, if any, outsiders blame Microsoft.
Also, as previously mentioned, most investors have focused heavily on the company's AI innovation and continued success in the cloud, which helped cause the $180 billion in revenue earned in the first nine months of fiscal 2024 to rise 16%, compared with the same period in fiscal 2023. Thanks to these gains, the $66 billion in net income reported for the first three quarters of fiscal 2024 increased 20% over year-ago levels. Even though operating expenses surged 27% higher over that time, slower growth in the cost of revenue allowed for more rapid profit growth.
Furthermore, Microsoft's 38 price-to-earnings ratio (P/E) is near a five-year high. Still, that's not an outrageous valuation that might bring about a massive drop in the stock price due to the outage. As long as users stay with Windows, Microsoft stock is unlikely to suffer.
Moving forward with Microsoft stock
Ultimately, Microsoft investors shouldn't experience a material impact from the outage. CrowdStrike has accepted the blame for the service interruption, and despite the past challenges of Windows, no evidence has emerged that justifies shifting blame to Microsoft.
Even if we find out later that Windows is partially at fault, today's Microsoft stock tends to trade on the performance of its cloud and AI applications. Investors in the software-as-a-service (SaaS) stock can likely rest easy when it comes to this specific issue. While Windows should not be an afterthought for Microsoft shareholders, investors will likely keep their focus on the cloud and AI applications that now drive Microsoft stock.
