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Microsoft (NASDAQ:MSFT) went public in 1986, and investors who bought some shares of its IPO are sitting on some massive multibagger gains today. However, Microsoft still generated some impressive gains for investors who hopped on nearly 30 years after its public debut.
In fact, investors who invested $1,000 in Microsoft on Feb. 4, 2014 — the day Satya Nadella succeeded Steve Ballmer as the tech giant’s third CEO — have watched that investment blossom to more than $8,400. Let’s look back at how Microsoft became a growth stock again under Nadella’s leadership.
Taking over a stagnant tech giant
When Satya Nadella took the helm, Microsoft faced several existential challenges. Its Windows operating system and Office productivity software still generated plenty of cash, but a growing number of users were sticking with older versions instead of purchasing its periodic upgrades.
Microsoft’s cloud platform, Azure, was much smaller than Amazon‘s (NASDAQ:AMZN) AWS (Amazon Web Services) platform, and its new cloud-based Office 365 services faced intense competition from Alphabet‘s (NASDAQ:GOOG) (NASDAQ:GOOGL) cloud-based Google apps.
On the hardware front, Microsoft’s Windows Phones had ceded the mobile market to Apple‘s iPhone and Google’s Android devices, and it made a last-ditch effort to save the platform by buying Nokia‘s handset division.
Meanwhile, its Surface devices — which launched in 2012 — initially confused consumers with the software limitations of Windows RT instead of breathing fresh life into the sluggish PC market. Its Xbox One console, which arrived in late 2013, was also overshadowed by Sony‘s PS4 in the gaming market.
Nadella’s “mobile first, cloud first” strategy
Between fiscal 2007 and 2014, which ended in June of that year, Microsoft’s revenue grew at a compound annual growth rate (CAGR) of 7.9%. But between fiscal 2014 and 2021, its revenue increased at a CAGR of 9.9%.
That acceleration occurred because Nadella adopted a new “mobile first, cloud first” mantra for the company. Instead of milking the company’s Windows and Office cash cows dry, Nadella focused on changing them into cloud-based services to lock in more customers. Microsoft launched Windows 10 as a free upgrade for most of its Windows users, monetized the platform by expanding its integrated app store, and expanded Office 365 — which later became Microsoft 365 — as a sticky subscription-based ecosystem.
Instead of burning more cash on its dying Windows Phone platform, Microsoft abandoned Nokia’s former handset unit and focused on developing better first-party apps for iOS and Android. It also aggressively expanded Azure with investments, acquisitions, and partnerships to catch up to AWS.
Azure held 22% of the global cloud infrastructure market in the second quarter of 2021, according to Canalys, compared to AWS’ 31% share. All of their other competitors, including Google Cloud, hold single-digit shares.
Back in 2015, Microsoft set a goal to boost its annualized cloud revenue from $6.3 billion to $20 billion by 2018. It surpassed that target in 2017 and generated over $69 billion in commercial cloud revenue in fiscal 2021.
Microsoft also continued to expand its lineup of Surface devices, and it broadened its gaming ecosystem with new subscription services like Xbox Game Pass and Xbox Cloud Gaming. It also launched the HoloLens headset to gain a foothold in the nascent augmented reality market in 2016.
What’s next for Microsoft?
Nadella’s “mobile first, cloud first” strategy saved Microsoft from becoming an also-ran, and boosted its market cap from about $300 billion in 2014 to more than $2 trillion earlier this year. Microsoft is worth about $2.3 trillion today, making it one of the world’s most valuable tech companies.
Microsoft will likely keep growing over the next decade as Azure, Microsoft 365, Dynamics, and its other cloud-based services gain more users. Windows will continue to evolve, it will roll out more devices for the convertible PC, gaming, and AR markets, and its dependence on traditional PCs will wane.
I believe Microsoft’s stock could still double or triple in value over the next decade. It still faces plenty of formidable competitors in its core markets, but it’s moving ahead of the tech curve again instead of falling behind it.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.