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Be Patient With Microsoft: The Nadella Era Will Have a Bumpy Start

By Tyler Lacoma – Feb 5, 2014 at 7:00PM

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We are not quite sure what to make of Satya Nadella yet, and that's okay.

The news that Satya Nadella was chosen as the new Microsoft (MSFT 6.16%) CEO (and the additional repositioning of Gates as a Yoda-like visionary for the company, instead of the chairman) dipped Microsoft stocks briefly on Tuesday. But, stabilization followed as analysts chimed in and the market tried to decide if Nadella was something to worry about.

It is a useful microcosm. The future growth of Microsoft is a bit uncertain at this point because Nadella remains a bit of an unknown. Following the Ballmer era, things are probably going to get worse before they get better. It's a classic picture of growing pains, but for those invested in Microsoft's continued dominance, the wait will be worth it.

While Nadella may provide Microsoft with new levels of profitability in the future, several factors indicate that a few tumbles may be ahead for the software giant before the road smooths out.

Caution, turbulence ahead
First, remember that the "one Microsoft" vision was Ballmer's project, and while it's likely that Nadella will continue with the strategy, growing pains are imminent as the plan adapts to a new leadership style. A more unified Microsoft is still likely, but expect some bumpy months ahead as gears shift and investors express their displeasure at the changes.

Second, compare Microsoft to some of the other major tech companies this year. Most of the exciting moves are being made by the other brands. Google Glass will be released this year. Apple is working on a smart watch. Both companies are considering new partnerships and putting plenty of resources into their mobile battle, a war that Microsoft has almost entirely fled at this point. Considering that mobile still has vast potential and gets plenty of attention from the market, Microsoft is likely to be overshadowed for at least the next year by sexier products and interesting developments in other fields.

Third, recall Nadella's previous specialty, cloud and enterprise, which analysts are making much of when predicting what the new CEO will do. It appears likely that, under Nadella's reign, the Azure cloud service will grow, Bing will become even more important, and online gaming services will become a greater focus of the Xbox creator. This is no doubt good news for hardware like the Xbox One, which is currently one of the big moneymakers for company (as well as one of the biggest items on the expense report). However, it may spell key changes for Windows hardware, layout, and devices. If the Windows OS takes a serious turn toward the cloud, expect investors to back away before they are convinced of the new direction.

Finally, if the reports on Nadella are accurate, he's going to be a very different type of boss than Ballmer. He spent his childhood in India, his hobbies are cricket and poetry, and he is far more of a thoughtful architect than a boisterous shouter.

Final Foolish thoughts
The internally divisive and competitive nature of Microsoft may need just such leadership, but switching up the culture of such a juggernaut is not an easy task. We do not yet know how it will affect profitability, future devices, or company focus.

Of course, ultimately these factors may be moot. What Microsoft needed was new blood at the top, and now it has that. In the long term, the move will probably yield positive results. But, change is hard, so sit tight and hold as Nadella works to find his place and align the Microsoft brand. In the end, the move will be worth the rough start.

Tyler Lacoma has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. 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.

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