Microsoft Is Transforming Itself and Investors Have 3 Reasons to Celebrate
If you are a Microsoft investor, the last 10+ years have been rough. Considering that if you'd bought at the high in 2001 (after the crash), you would have only paid about $1 less than the current share price, there doesn't seem to be a lot to celebrate. You have been paid a dividend since 2003, but there are few investors who are crowing about their Microsoft shares. The good news is, Microsoft is changing and there are at least three reasons investors should be excited about the future of the company.
The $12 billion reason to celebrate
Many uninformed investors think of Microsoft as a software company that relies on Windows to make its real money. However, that is the old Microsoft. In fact, today you could argue that the consumer adoption of the latest Windows operating system has never been less relevant.
Today's company generated more than half of its revenue from its commercial division, which licenses not only Windows, but Office and the SQL server, and offers cloud services as well. The first reason investors should celebrate is, in the current quarter, Microsoft generated a better-than-90% gross margin from the commercial division, and revenue growth was 10%.
Even competitors Google and Apple can't hope to approach Microsoft's gross margins. Microsoft's overall gross margin was 66%, which was actually down compared to last year. By comparison, Google's core business generates a roughly 60% gross margin, but Apple's gross margin came in at just 38%.
With server revenue growing by double-digits, and cloud services revenue that "more than doubled," Microsoft's commercial division is a big reason to buy the stock.
An opportunity is coming to the Surface
Many investors know that Microsoft needs to push its devices business if the company hopes to compete in the future. With Windows Phone lagging both Apple iOS and Google's Android system, the mobile market is growing fast and Microsoft needs to play catch-up.
In the tablet business in particular, Microsoft posted a significant win with Surface revenue more than doubling compared to last year. The strength of the Surface tablet is the second reason investors should be celebrating the company's results.
While it's true that Apple's iPad sales of more than $11 billion in the current quarter make the Surface's revenue of less than $1 billion look tiny, the point is the Surface is making headway in the market. With Google's Android system activating millions of devices every month, the faster Microsoft can push sales of its tablet, the better.
The X Factor
A third reason investors have to celebrate Microsoft's recent results is the strength of the company's Xbox sales. While the combination of iPads, iPhones, and Android tablets threatens to pry gamers away from their consoles, Microsoft proved during the holidays that consoles still have a place in the home.
Microsoft reported that it sold 3.9 million Xbox One consoles and 3.5 million Xbox 360 consoles in the last quarter. What is amazing about these numbers is, first the company's newest console outsold the older one with a shortened time on the shelf. Given that the Xbox One sells for $499 and an Xbox 360 can be purchased for as little as $199, the strength of the Xbox One console is impressive.
Maybe even more important is the fact that Microsoft has pitched the Xbox One as more than just a gaming console and hopes it will become the center of many customers' entertainment systems. With Google trying the backdoor approach to the living room with Chromecast, and Apple still viewing Apple TV as a secondary business, Microsoft stands to capitalize on this inattention by its competition.
Final thoughts
Though Google reported stronger revenue growth (17% vs 13%), and Apple has more net cash and investments ($100 billion+ vs $63 billion), there might not be a more underestimated company in the technology business than Microsoft.
The company's future is in the devices and consumer hardware and commercial businesses. Devices and consumer hardware posted a 68% revenue increase and the commercial business grew revenue by 10%. Even the Bing search engine reported a 34% increase in advertising revenue.
While weakness in the PC market is holding the company back, this is becoming an increasingly smaller part of the company's business. There is a new Microsoft emerging, and the company's recent results argue that the future may look nothing like the past.
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The article Microsoft Is Transforming Itself and Investors Have 3 Reasons to Celebrate originally appeared on Fool.com.
Chad Henage owns shares of Apple and Microsoft. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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