With over $376 billion in assets under management as of the end of Q1, Capital World Investors, or CWI, is a big-time institutional player, and it loves the technology sector. Behind only the Services and Financial sectors in value, technology accounts for nearly 15% of CWI's total holdings. It's number one holding, regardless of sector or industry? Microsoft (NASDAQ:MSFT), by a landslide.
With over 356 million shares to its name, CWI's Microsoft holding is valued at slightly over $16 billion as of this writing, and it added significantly to its stake according to its first quarter 13-F SEC filing. What is it that Capital World Investors sees in Microsoft? There were likely several key areas that struck a chord, and those same drivers of growth that made Microsoft so appealing to CWI earlier this year remain.
What's not to love?
Based on its ho-hum stock price year to date -- its actually down about 3% -- it appears as though many investors haven't bought into Microsoft's two-pillared "mobile-first, cloud-first" strategic initiative. It can be hard to change long-held impressions: just ask IBM. Like Microsoft, the "death of the PC" left the IBM faithful bemoaning its ill fortunes. The two tech stalwarts had a choice: change with the times, or become irrelevant.
Microsoft CEO Satya Nadella's shift to mobile and cloud solutions is akin to IBM CEO Ginni Rometty's "strategic imperatives," which emphasize its new business direction in cloud, big data, and analytics. Unfortunately for Microsoft and IBM, too often investors are focused on next week and month, not next year. But for companies the size of Microsoft in particular (it's more than twice IBM's market capitalization), transforming its business is akin to an ocean liner pulling a U-turn -- it takes time.
The important thing is to monitor wins during a company's transition, particularly those aligned with its new strategic direction. In that regard, Microsoft is making big strides, which is likely why it's come to the attention of fund managers like Capital World Investors.
What really matters
When Microsoft announces earnings on July 21 after the close, it will be shooting for its seventh straight quarter of triple-digit cloud growth. Last quarter -- Microsoft's fiscal 2015 Q3 -- saw a 106% jump in commercial cloud sales to an annual run-rate of $6.3 billion. The third quarter's cloud sales run-rate was $800 million more sequentially, and puts Microsoft on the short-list of cloud revenue leaders.
One reason for Microsoft's strong showing in the cloud is its software solutions, an aspect of the cloud that is expected to dominate overall sales in the coming years. By 2018, nearly 60% of the cloud "workload" will consist of Software-as-a-Service, up from just 41% two years ago. In other words, meaningful growth won't come from hosting data in the cloud -- that's already a commodity thanks to on-going price wars -- it will be products like Microsoft's Office 365 and Dynamics CRM as part of its Azure cloud platform solution that lead the way.
The meaning of "mobile-first"
It seems as though some investors and industry pundits either don't recognize, or don't agree with, Nadella's mobile strategy. "Mobile-first" is a lot more than manufacturing new smartphones and tablets and trying to gain market share in those hyper-competitive industries. Sure, Microsoft wants to sell more Lumia smartphones, and is well positioned to continue growing its Surface tablet sales.
As mentioned in a recent article, Microsoft's "tablet that can replace your laptop" loosely falls into what research firm Gartner calls ultramobile or hybrid devices, a market it expects to jump 70% this year. Great news, but devices are just one piece of Nadella's multi-part mobile pie. The other is to get Windows operating systems and solutions into as many devices as possible, regardless of manufacturer.
Greater user adoption of Windows mobile OS should translate to continued growth of Bing search traffic thanks to it being the default search engine. A jump in sales of solutions like Office 365 is another offshoot thanks to compatibility with iOS and Android-run devices. Despite its success in transitioning to new markets, Microsoft remains a great value. Don't be surprised to find billion dollar fund managers like Capital World Investors continuing to add to their respective positions: just as individual investors should.