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.
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 Amazon.com'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.