Microsoft stock has been one of the few stocks I have tracked consistently over the last 30 years. In 1990 I finally decided to buy Microsoft stock, even though the P/E on the stock was through the roof. Previously I had always looked for stocks that appear cheap on a valuation basis, but I felt Microsoft was going to be a winner and it was always overpriced. It turned out to be one of my best investments ever, splitting 7 times from 1991 through 2003.
Unfortunately, I fell in love with the stock and held it throughout the 2000’s when it did very little. The technology world was changing, and the Ballmer administration (in my opinion) lost touch with developers and made some really bad decisions. I finally drained my position in 2010 as I saw no ideas coming out of Microsoft that could justify me owning the position.
After Ballmer left and new CEO Satya Nadella came in, in 2015 I bought a small position since I new Nadella had been the head of the Microsoft Azure Cloud business, where I had seen good and creative decisions. I exited that position in 2016 with a small profit, when I became concerned that the cloud business could not make up for the loss of Windows revenue as the price of Windows goes closer to zero every year. The other concern I had (which I think is still somewhat valid) – is that the cloud business is a commodity business, and all the other cloud providers have alternate sources of revenue. For instance, Amazon and Google could treat the cloud business as a loss leader, really cut the price of cloud, and could survive on its other businesses. Microsoft is disadvantaged in that respect as the Windows revenue is dropping.
But this month, I decided to get back into Microsoft stock. After giving much it much thought I decided that even though it is expensive (much like when I first bought it) I think it has upside potential. Below are the reasons for finally getting back in:
- Coronavirus (relative) winner: Long term I think it will gain market share as the S&P 500 companies are forced to retool their workforce for remote work. I think big old companies like that are most likely to default to Microsoft – they likely have Microsoft applications in house, and it would seem to be a comfortable choice. Most companies when they move to the cloud take a ‘lift and shift’ strategy – where they just move applications to the cloud, then retool the applications to run more efficiently and cheaper. During the lift phase of this process, this typically costs more than in-house processing with the promise is long term cost reduction. Microsoft should see profits jump on this shift.
- Microsoft Teams vs Zoom: In 2000’s style Microsoft execution, Microsoft inexplicably lost the business video conference war with Zoom. Everybody is using Zoom – when Skype has been around for years. However, I am thinking (hoping?) Microsoft Teams is being improved and has videoconferencing, and should be a better choice for enterprises than Zoom. Maybe this is a Blockbuster vs Netflix analogy – in which case I will be wrong, but I think Microsoft Teams has a decent chance of taking major market share in remote worker productivity.
- Augmented Reality(AR) / Virtual Reality(VR): I am beginning to think maybe the enterprise is where AR/VR will take hold and find the ‘sticky’ application that makes it a must have. Maybe with the rise of telecommunication, AR will be the next level on that. Microsoft has done a lot of work on the hololens and if they this technology firmed up and with a good product team, this could be a real growth driver.
So Microsoft is back in the portfolio. In this coronavirus stock market, I am taking the time to improve my portfolio. I sold some other technology stocks to add Microsoft – rather than commit new money to this stock market. I hope I am not too late on this purchase, but it feels comfortable to be back in the Microsoft fold.