This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Nadella's Microsoft Even Cloudier Than Ballmer's

NEW YORK (TheStreet) -- Satya Nadella has barely warmed the seat as Microsoft (MSFT - Get Report) CEO and he is being bombarded with advice, speculation and claims of a "new direction" for the company.

But just how broken is Microsoft?

In its most recent fiscal year, Microsoft had almost $78 billion in sales with net income of $21.8 billion. For the first six months of the current fiscal year, it has reported sales of about $43 billion with net income of $11.8 billion. In terms of sales and net income, Microsoft remains bigger than Google (GOOG).

Despite all the media reporting on how badly run the company was under former CEO Steve Ballmer, Microsoft remains hugely profitable, with its Windows operating system and Office suite at the heart of that profitability. A certain amount of continuity is expected, and choosing an insider as CEO is not an indication, by itself, of a major change in direction.

But hedge fund investors are demanding major change. They want to unlock the value of product successes such as the Xbox, possibly through a spinoff, and dump losers like Windows Phone and the Microsoft Surface, both of which are losing money. The price-to-earnings ratio for Microsoft is currently at a market-lagging 13.3, similar to Apple's (AAPL) 12.6, while Google has an eye-popping P/E of 31.5.

WATCH: Jim Cramer to Microsoft's New CEO Satya Nadella: BUY BUY BUY

Bringing excitement to Microsoft could cause investors to value its earnings more highly, raising the stock price and giving the hedge funds that have invested in it a quick profit. They want Nadella to indicate a new direction that will create that excitement.

The question is not only whether Nadella has a firm direction in mind for the company, but whether he can get investors to buy into whatever transformation he chooses to make, and sell it to a skeptical computing world.

Much of what is expected from Nadella centers on cloud. I have written that Nadella needs to convince his board to invest much more heavily in cloud infrastructure now, when the market is valuing it highly, or lose ground permanently to its rivals.

Before taking the top job, Nadella ran Microsoft's Azure cloud service, which has been badly lagging's (AMZN) Amazon Web Services despite recent efforts to match Amazon's features and pricing.

Amazon offers pure cloud infrastructure. When tools for writing and running software are added to a cloud, it becomes a cloud platform, and that is how Azure was originally sold, as a platform. The idea was that by supporting Microsoft tools, Azure offered a smooth transition to cloud for Windows customers.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
MSFT $49.87 0.00%
AAPL $93.74 0.00%
FB $117.58 0.00%
GOOG $693.01 0.00%
TSLA $240.76 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs