Microsoft: Old Age to Growth?

10/03/2014 8:00 am EST


Genia Turanova

Editor, Leeb Income Performance

For some time now, we have been pounding the table about the values in the tech sector, asserts Genia Turanova, editor of Leeb Income Performance.

For some of these companies, we have witnessed genuine progress this year, both in business terms and share price terms.

Microsoft (MSFT) is on track to reshape its business as to once more make this "old-age" tech giant a growth company.

As new CEO Satya Nadella, appointed in February, attempts to cut costs and switch the company's direction, Microsoft announced 18,000 job cuts, 12,500 of them related to its Nokia acquisition.

The software business has exceeded estimates but Microsoft has failed as yet to deliver in smartphones and tablets. On the plus side—and we would concentrate on this—sales exceeded estimates.

Moreover, the company's commercial cloud revenue doubled to a $4.4 billion annualized rate. Microsoft added over 1 million subscribers to Office365 to a total of 5.6 million. It also expects its Bing search engine to turn profitable in the fiscal year after next.

In terms of future direction for Nokia, Nadella remains quite optimistic. The acquisition closed only in late April, after all, and Rome was not built in a day.

Whereas computing power was once scarce, it has grown into a nearly limitless resource in a world soon to have more than 5 billion people with Internet-connected devices used in all aspects of their lives, business, personal, and creative.

Meanwhile, the company has an impeccable balance sheet: $85.7 billion in cash and $20.6 billion in long-term debt as of the end of the last quarter. Yielding 3.1%, Microsoft remains a buy in our Growth & Income portfolio.

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