Microsoft (NASDAQ:MSFT) investors love CEO Satya Nadella: especially by comparison to his predecessor, Steve Ballmer.

It's not hard to understand why. Microsoft stock suffered years of underperformance during Ballmer's tenure. But since Nadella took the reins in early 2014 and shook up Microsoft's strategy, the stock has been on a tear, rising more than 25% to around $46 (and briefly touching $50 in April).

MSFT Chart

Microsoft Stock Chart, 2/4/14-present, data by YCharts

That's the good news. The bad news is that Microsoft's turnaround hasn't really lifted off yet. Nadella's main accomplishment so far has been getting people excited about Microsoft again.

It's all hopes and dreams so far
This fact can be seen from overlaying Microsoft's P/E ratio and forward P/E ratio on the chart of its stock performance.

MSFT Chart

Microsoft Price vs. P/E ratio, 2/4/14-present; data by YCharts

This chart clearly shows that Microsoft's P/E ratio has risen in lockstep with its stock price ever since Nadella took the helm. In other words, Microsoft hasn't actually posted earnings growth since Nadella became CEO -- indeed, analysts expect Microsoft to post EPS of $2.42 for the fiscal year ending this month, down from $2.63 a year ago.

Microsoft's forward P/E ratio hasn't risen quite as much as its stock price. But the forward P/E ratio is a function of analysts' earnings estimates for the next fiscal year. Optimism about Microsoft's future prospects thus may be inflating the forward earnings estimates, driving the forward P/E ratio down. However, there's no guarantee that Microsoft will be able to hit these EPS estimates.

Windows: engagement over profit
The centerpiece of Satya Nadella's reinvention of Microsoft has been the move to a "mobile-first, cloud-first" mind-set.

Nadella has made some bold moves to support this strategy, such as making Windows free for smartphones and tablets with screen sizes of less than nine inches. Microsoft has also cut the price of Windows for some consumer PCs, to better compete with Chromebooks. Not surprisingly, these moves have negatively affected Microsoft's sales and earnings.

Bulls hope that the release of Windows 10 next month will catalyze a rebound in PC sales, driving growth in the Windows business (which is still a huge cash cow). However, in another bold move, Microsoft is allowing consumers to upgrade their existing Windows 7 and Windows 8 PCs to Windows 10 for free.

Windows 10 will be a free upgrade for most consumers. Photo: The Motley Fool

This means that consumers won't need to go buy a new PC -- with a paid copy of Windows 10 -- to enjoy the upgrade. That could sharply curtail any sales bounce that might have otherwise occurred.

On the commercial side, Microsoft isn't giving away Windows 10 for free. But corporate PC upgrades follow a very long cycle -- many businesses upgraded from Windows XP to Windows 7 just last year. There's no realistic prospect for rapid adoption of Windows 10 in this market.

Rapid cloud growth, with a catch
Despite the threats to Microsoft's Windows cash cow, bulls might point to Microsoft's success in the cloud. Indeed, Nadella proudly announced on Microsoft's most recent earnings call that commercial cloud revenue had grown at a triple-digit rate for seven consecutive quarters, reaching a $6.3 billion annual run rate.

Microsoft is disrupting traditional sales of its Office software. Photo: The Motley Fool

However, while some of this is new, incremental revenue, a lot of this growth is being driven by uptake for Microsoft's cloud-based Office 365. This is displacing traditional "transactional" sales of Microsoft Office.

As a result, revenue in the traditional "commercial licensing" segment -- which represents nearly half of total company revenue and more than 60% of Microsoft's gross margin dollars -- declined 3% last quarter. (In constant currency, the decline would have been 1%.)

Obviously, if the Office cash cow is going to be disrupted, it's better for Microsoft itself to be doing the disrupting, rather than cloud-based alternatives from competitors. But it's still important to recognize that Microsoft's $6.3 billion in annualized cloud revenue is not all "new" to the company. Moving revenue from one line item to another isn't the same thing as growth.

High hopes
Satya Nadella's bold moves to make Microsoft relevant again may pay off in the long run. Then again, they may fail to right the ship. Microsoft has hugely profitable legacy businesses, and Nadella's strategy is essentially to disrupt these businesses in the hopes of creating new business models that will be more sustainable in the long run.

However, bulls should recognize that while there are several "green shoots," Microsoft hasn't returned to organic revenue or earnings growth yet. (Revenue growth in the past year has been driven entirely by the purchase of Nokia's money-losing smartphone business.)

The reason why Microsoft stock has performed well since Nadella took over is simply that he has gotten investors more confident about the future. If he doesn't deliver meaningful earnings growth in the next few years, that multiple expansion could be reversed, taking investors' gains with it.