Apple (AAPL - Free Report) recently became the first U.S. company ever to surpass a trillion dollars in market capitalization and has continued to build on these gains over the past few weeks in the midst of what has now become the longest bull market in history.
Amazon (AMZN - Free Report) and Alphabet , with market caps of $929B and $840B, respectively are threatening the trillion dollar barrier as well. Close behind is the original tech giant – Microsoft Corp (MSFT - Free Report) , and it’s been on a great run lately with earnings and future estimates rising and a current market cap of $828B.
The “Lost” Decade
After its meteoric rise from the tiny software startup founded by Bill Gates and Paul Allen to the world’s largest software company, Microsoft shares spent over a decade stuck in the mud, with essentially no share appreciation from 2001 until 2013. (In all fairness, Microsoft did start paying a quarterly dividend in 2003, so the total return to investors was not actually zero, but it was close.) Public perception was that the company’s products had grown stale at the same time Apple was making major gains in the desktop computer market with its fresh and intuitive products powered by Mac IOS.
A Vanity Fair article in 2012 titled “Microsoft’s Lost Decade” compared the company’s technology to Sears (SHLD), the once-mighty retail and catalog powerhouse who’s offerings fell swiftly out of favor with consumers.
Blame for Microsoft’s malaise was heaped on the shoulders of CEO Steve Ballmer, who took over from Bill Gates in 2000 and steered to company into many new areas – video games, e-books, search, etc., none of which were ultimately very successful.
In 2014, Satya Nadella, the former head of Microsoft’s Cloud and Enterprise division, took over as CEO and almost immediately put the company on firm footing once again. With a series of strategic acquisitions and a restructuring that focused on its core strengths – rather than chasing ideas like social media and mobile phones that were already crowded with formidable competitors – Microsoft regained its position as a leader in operating systems, office suites, server technology, and enterprise software. It also launched a project called Azure Information Protection that allows businesses to protect data as it moves between servers and devices that has become Microsoft’s fastest growing product, growing 89% in revenues in Q2 2018 year-over-year.
Editor note: I got my first inkling that something powerful was happening at Microsoft in the summer of 2015 when I was killing some time at a mall in Palo Alto with my 13 year-old nephew while our relatives shopped for clothes. His choice (after a quick trip to the candy store) was to spend 2 hours at the Microsoft retail store playing video games on a 20-foot high array of screens – and when we arrived there, a bunch of his buddies were already there.
Microsoft shares have been one of the best large-cap performers over the past four years, with the shares rising 200% over that period. Earnings are on the rise and future estimates are as well, with 15 analyst revisions over the past 60 days, earning MSFT a Zacks Rank #1 (Strong Buy).
The resurgence of Microsoft teaches us two powerful lessons. First, even the best companies can lose their way if they chase fads that seem to be working at other firms at the expense of their core expertise. Second, they can definitely get their mojo back if they refocus on producing the best possible new versions of the products where they’ve already been the leader.
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