Can Microsoft Corporation Use Azure Stop the Windows Rot?

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Satya Nadella has made Microsoft Corporation. (NASDAQ: MSFT ) a hot stock by making it a leader in cloud-based tools, and giving it the most profitable cloud.

MSFT Stock: Can Microsoft Corporation Use Azure Stop the Windows Rot?

Source: Mike Mozart via Flickr (Modified)

The shares are up 40% just in the last year, about 140% since he became CEO in February 2014, meaning that as fast as founder Bill Gates keeps trying to give away his fortune , the thing just gets bigger .

Nadella is also making smaller fortunes. I personally bought into Nadella's turnaround story in October 2015 and have a 68% gain as this is written.

But while Nadella has been very, very good for Azure, the company's cloud data center network, things haven't been so good for Windows, the desktop operating system Microsoft was built on. Its market share since Nadella's arrival at the helm has dropped steadily, from over 89% to about 82% on desktops , and less than half of Windows users are still using the latest version, Windows 10 .

Fall of the Old Empire

There are losses on older products across the board. Microsoft Office is losing share to G Suite from Alphabet Inc (NASDAQ: GOOG , NASDAQ: GOOGL ) and Microsoft's new Edge browser is practically irrelevant against Google Chrome.

Cloud applications gave Microsoft a solid 12% year-over-year growth rate in its most recent quarterly report with a 10% gain in operating income. The company is on pace to beat last year's $89 billion in revenue by a huge market, topping $100 billion for the first time. Take out the quarter's Donald Trump tax cut loss of $13.8 billion , which it will more than make up for in the future, and operating earnings should top $30 billion for the year, implying a price to earnings ratio of 23, entirely reasonable in the current market.

News about Microsoft is almost entirely in the cloud. It's trying to put identity onto a blockchain . It's building collaboration into education software targeting Google Drive customers with free storage , and its Surface Book 2 is getting strong reviews .

But all this is covering up serious weaknesses in its core technology. Windows remains a memory hog, taking ever-longer to boot into any application. The company's effort to counter Google's Chrome OS is dead , it's having to rebuild its Skype video calling software from the ground-up, and its support for Windows 10 is getting serious pushback from enterprises.

While Microsoft has been becoming International Business Machines Corp. (NYSE: IBM ) - in other words, a dominant enterprise player, Google is becoming Microsoft, eating desktop market share by making its desktop lighter.

Retreating into the Cloud

Microsoft is no longer in mobile, despite advertising its new tablet version inside Office 365. It is losing mindshare on laptops and desktops.

But investors aren't worried because they have the cloud. Microsoft drew $18.6 billion in revenue from its cloud last year, and that grew 56% year over year in the fourth quarter.

Microsoft is transforming Azure into an "event-driven" operating environment , meaning the company is more focused on operating the new computing world than just building it.

The Bottom Line

You can see this as either a glass half-empty or a glass half-full.

Microsoft's cloud transformation means it now has a firm foundation to which it can move applications like Office and LinkedIn , which are still not entirely cloud-based. But Nadella has been in charge for four years, and Google continues to chip away in areas Microsoft used to dominate.

You can buy Microsoft on its cloud dominance, or sell it based on its desktop weakness. For now, I'm holding on, but I'm not expecting last year's big gains in the stock to continue.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time , available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.comor follow him on Twitter at @danablankenhorn . As of this writing he owned shares in MSFT.

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The post Can Microsoft Corporation Use Azure Stop the Windows Rot? appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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