Longboard Asset Management, a firm most notable for correctly forecasting Tesla's recent rally, is now betting on Microsoft (NASDAQ:MSFT). According to Longboard, the market just doesn't understand Microsoft -- and in five years, it's going to be one of the most valuable companies in the world.
Primarily, Longboard's argument is based on three factors: the rise of hybrid devices (tablets that can run both Windows and Google's (NASDAQ:GOOGL) Android), the dominance of Office, and Microsoft's advancements in cloud computing (a market still led by Amazon.com (NASDAQ:AMZN) Web Services).
The best of Google and Microsoft in one device
Longboard believes a new class of devices is going to take the market by storm in the coming years -- tablets with dual operating systems, ones that run Google's Android and Microsoft's Windows interchangeably. There's some evidence that these devices could be on their way, but there are quite a few reasons to doubt them.
Back in June, Samsung unveiled the first of these devices in the form of the ATIV Q -- a convertible Windows 8 tablet similar to Microsoft's Surface Pro, but unique in that -- with the press of a button -- the user could switch from Windows to Google's mobile operating system. Unfortunately, the future of the ATIV Q is uncertain. Samsung had floated a September release, but now halfway through October, the device is nowhere to be found, and there have been rumors of patent-related issues delaying its release indefinitely.
Moreover, as I wrote previously, the very existence of such a device is not good news for Microsoft. Windows 8, in and of itself, is intended to be a hybrid operating system. Having to bring in Google's Android to cover up Microsoft's mobile incompetence isn't good news for Microsoft.
Microsoft's Office monopoly lives on in the age of the cloud
But when it comes to office productivity software, Microsoft is far from incompetent. As Longboard points out, Microsoft Office continues to survive -- even thrive -- in the face of rapid tech innovation.
Microsoft's decision to take Office to the cloud -- in the form of Office 365 -- has been a smashing success. Previously, Microsoft released a major update to Office every few years (Office 97, 2003, 2007, etc.) and hoped that businesses and consumers would purchase the new software for several hundred dollars. But now, with Office 365, Microsoft has embraced a subscription model -- one in which customers make regular payments -- and Microsoft has a steady stream of revenue: Office 365 is now on pace to bring in $1.5 billion per year.
Of course, there are reasons to doubt the continued growth of Office. Competitors are attempting to break into the market, most notably Google.
Google is pushing Apps heavily, its Web-based alternative to Office. Google freely admits that its apps are not nearly as powerful as Microsoft's product, but for many people, they're good enough -- and they're much less expensive. Google's enterprise head, Amit Singh, told AllThingsD last year that his company aims to capture 90% of the market.
Microsoft could become the leading enterprise cloud company
Lastly, and perhaps most significantly, Longboard points out that Microsoft is, fundamentally, an enterprise company, and as it pushes products like SharePoint, Lync, and Azure, it's poised to dominate the enterprise cloud opportunity.
A similar argument was made earlier this year by hedge fund ValueAct, which -- after investing $2 billion into Microsoft -- is poised to get a seat on Microsoft's board. In April, ValueAct argued that the cloud was Microsoft's real opportunity, and that its infrastructure-as-a-service (IaaS) product, Azure, would become a huge business. That may be, but again, Microsoft faces a lot of competition in the space, in particular, from Amazon.
Amazon Web Services, Amazon's own IaaS, leads the sector. According to research firm Gartner, Amazon Web Services has five times the capacity of its 14 biggest rivals combined. Netflix, one of Amazon's competitors, still uses its cloud services -- Amazon is that dominant.
And while most investors might think of Amazon as a retailer, its cloud services have become an enormous part of its business. According to Morgan Stanley, Amazon Web Services is now worth more than 16% of Amazon.
Microsoft has moved to compete with Amazon on price, and as GigaOM points out, different developers have reason to prefer Azure over Amazon Web Services. But at any rate, with Amazon as a competitor, Microsoft's dominance of the cloud cannot be assured.
Microsoft shares to double in three years?
Longboard believes that Microsoft shares will trade over $60 within three years. A combination of better hybrid devices, Office 365, and control of the enterprise cloud will lead Microsoft shares to new highs.
Perhaps, but there's reason to be skeptical. Devices running Google's Android and Microsoft's Windows might never see the light of day, Office 365 is seeing increased competition from Google, and Microsoft faces heavy competition in the cloud, particularly from Amazon.
With Tesla now trading near $180, Longboard's last call turned out fantastic. Still, with the traditional PC in decline and no long-term manager in place, investors might find better opportunities elsewhere.