Microsoft (NASDAQ:MSFT) hasn't done much for shareholders in 2015. Year-to-date, it's basically flat -- just slightly under-performing the broader S&P 500.
But could Microsoft shares be headed higher? Below are three scenarios that could boost Microsoft's stock. While a general market downturn could always take a toll on shares, Microsoft investors would likely cheer the following developments.
PC shipments could return to growth
PC shipments have been in a persistent slump since 2012. Most recently, research firm Gartner reported that PC shipments fell 9.5% on an annual basis in the second quarter, and are on pace to finish the year down 4.4%. Several factors have affected PC shipments, including the rise of smartphones and tablets, lack of innovation, and a tepid reception for Microsoft's Windows 8.
If PC shipments return to growth, Microsoft should benefit, and shares could rise. Although Microsoft isn't monetizing Windows in the same way it once did -- consumers who own Windows 7 or Windows 8-powered machines can receive Windows 10 as a free upgrade -- more demand for Windows would be a positive development for shareholders. Business users must still pay for Windows, and licenses purchased for most new machines also carry a fee. Windows 10 is deeply integrated with many of Microsoft's online services, including Bing, which opens additional revenue opportunities.
Commercial cloud revenue could continue to rise
The single largest factor that's likely to weigh on Microsoft investors is the performance of its commercial cloud business. Many major shareholders, including the hedge fund ValueAct, have pinned their hopes for the stock on Microsoft's commercial cloud services, which include Office 365, Dynamics CRM, and Azure. Last quarter, Microsoft's commercial cloud revenue rose 88% on an annual basis. Microsoft's management expects it to continue rising. It's currently on an annualized run rate of $8 billion -- Microsoft believes it will more than double by fiscal year 2018, reaching $20 billion.
If Microsoft's cloud outperforms managements' expectations, it should benefit shareholders. One way that could happen is through widespread adoption of E5, a new, enhanced version of Office 365. In addition to Microsoft's standard productivity software, E5 includes cyber security features, analytic tools, and real-time communication services. Microsoft believes that E5 increases Office 365's total addressable market by more than $50 billion, and if it receives a strong reception, it could help Microsoft's cloud business outperform.
Interest in HoloLens could intensify
Smartphones have become the primary computing device. That's a problem for Microsoft, as with its single-digit market share, Windows Phone is irrelevant in the world of mobile computing. Microsoft hasn't given up on Windows Phone entirely, but after writing off almost the entire value of its handset business and laying off nearly all of the employees it acquired from Nokia, it seems to have accepted the notion that it will never play a major role in the smartphone market.
But while smartphones may be the dominant computing device today, that may not always be the case. Once, Microsoft's monopoly-like grip on the world of computing seemed untouchable -- it was hard to imagine that the PC would ever be toppled. Though it may seem unthinkable, the same could eventually happen to the smartphone, with a new platform arriving to take its place. Microsoft's management is preparing for that day. In an interview with ZDNet's Mary Jo Foley, Nadella explained.
"If anything, one big mistake we made in our past was to think of the PC as the hub for everything for all time to come. And today, of course, the high volume device is the six-inch phone. I acknowledge that. But to think that's what the future is for all time to come would be to make the same mistake we made in the past...we have to be on the hunt for what's the next bend in the curve."
What's next could be Microsoft's augmented reality headset, HoloLens. Microsoft unveiled HoloLens in January, and plans to begin shipping the device to developers within a year. Consumers probably won't be able to purchase it until 2020, which means that -- even if it is a success -- it won't show up in Microsoft's financial results for several years. Still, the market is forward-looking, and if early impressions are strong and excitement for HoloLens builds, investors could factor HoloLens' success into Microsoft's valuation, boosting its multiple and raising its share price.