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AP Photo/Elaine Thompso
It’s a new dawn at Microsoft under Nadella.
GROWING, GROWING, GONE

This is the new Microsoft

Dave Gershgorn
By Dave Gershgorn

Artificial intelligence reporter

Microsoft has a real shot to end the year as the most valuable public company in the world.

That wasn’t the case a year ago, and it would have seemed absurd five years ago, when the company was being leapfrogged by burgeoning behemoths like Amazon and Google. The last time Microsoft was the most valuable company in the world was 2000, before being eclipsed by GE in the dot-com bust.

But Microsoft is back. Its place as “most valuable public company” isn’t one that was earned on the back of red-hot earnings report or a disruptive product—Microsoft has a drastic market sell-off of its competitors, a clear vision, and aggressive sustained growth to thank for the title. Its stock is up 20% from the beginning of the year.

This year has been a year of renewal for the software giant. In March, CEO Satya Nadella sent an email to all Microsoft employees unveiling a drastic reorganization of the company. Every product-producing group would now fall under either Cloud & AI or Experiences & Devices, rather than disparate units for Windows, software, and cloud.

It’s a signal to the company—and the world—that Microsoft isn’t just the maker of Windows and Microsoft Office anymore. Microsoft’s growing cloud business, in which it rents server space and enterprise software to other companies, is a bright spot on its quarterly earnings reports, with more than 20% growth year over year, according to company filings. Azure, the aspect of the cloud business focused on artificial intelligence and software deployment, is growing in the high double digits every quarter, with 74% year over year growth as of October’s earnings report. Microsoft’s cloud business now has a $27 billion run-rate.

This new emphasis on cloud computing has also given Microsoft the opportunity to pivot its consumer and business products to subscription-based services, because the business model relies on cloud storage of documents and incremental updates to the software. Microsoft Office 365 and Dynamics 365, its suite of businesses tools, are now both sold as subscriptions, which means more recurring revenue rather than companies buying the software once and not paying again for years. These software packages naturally tie into Microsoft’s other cloud services, giving it the opportunity to sell more storage space or integrated software.

These business tools are still paying the bills—cloud revenue counts for less than a third of the company’s total revenue as of October. Productivity and business tools brings in a third, and the last third is made of a cocktail of other revenue, including Microsoft’s growing hardware business, which consists of Xbox and Surface. Gaming revenue grew 44% year over year in October, mostly from software like games and Xbox Live subscriptions. And Microsoft’s own computers are finally getting their time in the sun.

While the Surface line of computers had received lukewarm reception from tech reviewers in the past, the Surface Laptop 2, Surface Go, and Surface Book 2 all got glowing reviews in 2018.

It’s hard not to point toward Nadella as the impetus of these changes. After being CEO for four years, the stock price has soared and the company has focused on high-growth revenue streams like the cloud. Windows, which represents Microsoft’s software dominance in a bygone age, has been sidelined. Even the culture, which under previous CEO Steve Ballmer was hostile towards other platforms and operating systems, has changed. Nadella uses an iPhone on stage (gasp), and this year bought GitHub, a forum for code, for $7.5 billion. It’s a nod to a more intersectional Microsoft, one that’s more interested in code of all kinds, rather than promoting just its own platform. This comes two years after Nadella made Microsoft’s largest deal ever, its $26 billion acquisition of LinkedIn.

The year ahead looks bright for the 43-year-old company. It’s likely to hit the coveted $1 trillion in market cap, which Apple and Amazon both touched for a short while in 2018. And with a level of enviable sustained growth, 2020 might look just as bright.

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