Almost three years ago, Microsoft named Satya Nadella as its CEO. Since then, Microsoft has reversed its fortunes and returned to being a growth stock after stagnating for nearly a decade — and 2016 was not an exception to that.
Indeed, as Microsoft continued its transition to cloud-based services and adopting multiple platforms, as well as taking big bets like buying LinkedIn for $26.2 billion in cash and continuing to flesh out its Surface devices, it’s been rewarded by Wall Street. Microsoft even made an effort to steal Apple’s thunder with its Surface Studio, a desktop geared toward the designers and professionals that Apple has always more or less had on lockdown. And then there’s Hololens, another bet on augmented reality that could help further cement its foothold in the enterprise.
You could argue, in Wall Street’s eyes, that 2016 was a year of continued investment in bets beyond the core original services that rocketed it to a massive technology company.
All of this is something that’s really palatable for investors: a strong growth story backed by a strong leader with a lot of momentum going into 2017. Its Azure cloud services continue to look like a strong business — much like the business that’s propped up Amazon and given Wall Street something to be really excited about — and its Office products continue to chug along as it’s expanded to more diverse platforms.
If you wanted any indication of the level of an about-face Microsoft is doing under Nadella, here’s one for you: it joined the Linux Foundation in November. Wall Street finally has a unique Microsoft under Nadella that’s willing to throw a lot of things against the wall and break tradition. While it’s acquiring quite a lot of risk with these strategies, it provides potential growth for a company that was once just simply an enterprise backbone that continued to generate cash.
Nadella took over Microsoft in the midst of a transition, and Microsoft is still somewhat in that transition. Its mobile bet didn’t play out and it’s started to refocus its resources to other parts of the business, and while all these bets still seem to be in their early stages, the arrow seems to point upwards. But like any company (even Google), these bets are going to take a while to play out. In reality, Microsoft’s revenue growth hasn’t really been all that impressive.
With all these bets comes a lot of risk. In November, Microsoft launched a collaboration tool that’s competing with the red-hot startup Slack called Teams. Earlier this year Microsoft mulled acquiring Slack for around $8 billion, but it decided to throw its resources behind Skype and Teams. Microsoft has tried to gun for enterprise collaboration before, such as when it bought Yammer for $1.2 billion, but has never quite seemed to crack it or gather the kind of praise and shine that Slack has garnered. (Granted, that pristine image of Slack seems to be within Silicon Valley and its growth appears to be slowing down.)
Microsoft has to ensure that it doesn’t fall to the same fate as Google, which rapidly threw resources behind a variety of perpendicular services like Nest and Google Fiber. Inevitably, Google CFO Ruth Porat indicated that the company would have to be more judicious about its spending on these alternative bets. While Microsoft’s alternative bets still seem to be closer in line with its core mission, it still has to ensure it’s making the right ones — especially when it appears to once again be going after a space like enterprise collaboration where it stumbled before.
Still, once again, it’s a growth story. The upside for these bets continues to outweigh Wall Street’s massive concerns like the ones it has for Google or Apple. Shares of Microsoft are up more than 12% on the year, and in the past two years they’re up around 34%. For a company that spent nearly a decade in stasis and having disappointing long-term prospects for Wall Street, that’s quite a change of pace.
In 2016, Microsoft started to flex its muscles not as an old-school enterprise giant, but one that once again gets design and a future where everything isn’t necessarily running on a PC. Microsoft now looks to exist not only on the strength of its own hardware, but also with its professional services existing on nearly all platforms and running the backbones of the rest of the Internet.
Then there’s the dabbling in machine learning, like what many other companies are experimenting with. Nadella basically built an entire keynote around this at the Microsoft Ignite conference in September. Nadella laid out Microsoft’s plans to apply the techniques it has learned and data it has acquired in order to further augment its services like Office 365. And Microsoft earlier this year also opened up its virtual assistant, Cortana, to third-party developers.
While all this may seem like something that’s a little original for Microsoft, it’s really a necessity for 2017 with Google and Amazon rapidly expanding their footprint for interactivity with users through things like Google Assistant, Alexa and Siri. Adding layers of machine learning to its existing services to make the experience more seamless and easier in general is going to be tabler stakes for 2017.
For Microsoft, this can’t even afford to be an alternative bet and the company has to nail it down in order to supplement the core services and make them better. It bought predictive keyboard technology startup SwiftKey earlier this year and there’s a lot of overhead to improve its products like Office with more natural language tools that can streamline the processes on which it’s built its entire business.
It’s a strategy that looks to sit somewhere in the middle of a lot of what other companies are doing. Amazon is gunning for cloud services, while Apple is betting it’ll continue to gather momentum with new hardware and expanding its online services like Apple Music. Microsoft’s diverse approach — which, Wall Street loves diversity — appears to have a good look under Nadella.
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