Microsoft had an amazing year. The tech giant, which has been in operation for nearly 50 years, broke through the $2 trillion mark in June to join Apple's exclusive club, Google's parent company Alphabet, which was briefly joined. As of Dec. 6, Microsoft was worth $2.4 trillion, which is staggering.
Over the past 52 weeks, Microsoft's stock price has soared 45 percent, easily surpassing the broader S&P 500, which is up 21 percent, not to mention rivals Apple and Amazon, whose shares are up 23 percent and 5.5 percent, respectively.
The company's financial reports are just as impressive as its market capitalization. Over the past 12 months, the software giant has reported revenue of up to $176 billion — a year-over-year increase of nearly 20 percent. Microsoft has always been a cash cow, operating in the highly profitable software space.
What's truly impressive is that under CEO Satya Nadella, the 46-year-old company is pioneering new businesses — including cloud computing, connected apps like Teams and social apps like LinkedIn — and thriving.
It's also remarkable that Microsoft has flourished while avoiding public outrage or antitrust scrutiny faced by its large tech peers such as Amazon, Facebook, and Apple. It is for these reasons that Yahoo Finance named Microsoft Company of the Year for 2021.
Microsoft reinvents itself by decentralization
Bill Gates and Paul Allen founded Microsoft in 1975 and developed what would become the most widely used operating system in the world. Gates remained CEO until 2000, after which Steve Ballmer took power. The duo witnessed a series of major product launches and challenges at Microsoft, the most important of which was Microsoft's antitrust struggle with the U.S. Department of Justice, which lasted until 2002.
While Microsoft is a reborn tech giant in 2021, the distractions caused by its antitrust struggles and a series of missteps mean it has spent years vying for relevance among its big tech peers.
Despite spending more than $7 billion to acquire Nokia, Microsoft has failed to penetrate the smartphone market. While LinkedIn is doing well, Microsoft's social media capabilities pale in comparison to Facebook's, and in the search engine space, Bing has also failed to catch up with Google.
But in 2010, Microsoft introduced Azure — a cloud-powered version of Windows — and it didn't look back. It is now one of the world's largest cloud providers, offering the latest cloud services, second only to Amazon Web Services in market share.
These efforts require Microsoft to reinvent itself. Instead of peddling individual pieces of software, it started selling subscriptions that generated recurring revenue. While individual sales provide more short-term revenue, overall, subscriptions bring in more cash revenue.
For example, its Office products are now mainly available to commercial and consumer applications as cloud-based products. And in the first quarter of fiscal 2022, this means that revenue from the commercial and consumer businesses grew by 18% and 10%, respectively.
Scott Snyder, a senior fellow at the Wharton School of the University of Pennsylvania, told Yahoo Finance: "For a long time, [Microsoft] resisted cloud computing and opened up their software and ran it on other devices because they thought it was going to gobble up Windows because that's their profit machine." At the time, everyone thought cloud computing was a nascent business. ”
But Nadella — who helped nurture Microsoft's cloud business before becoming Microsoft's third CEO in 2014 — sees an opportunity. And according to analysts, it was cloud computing that pushed Microsoft to the $2 trillion mark in 2021.
"But then you start to join these other things that they bring, whether it's LinkedIn or other types of platforms that allow people to start building on Microsoft solutions," Snyder adds, "and they're really well set up to help businesses with digital transformation in the long term." ”
While Microsoft has about 20 percent of the global cloud market share in 2020, behind Amazon's 41 percent, the software company is slowly gaining support from the Everything Store.
Over the past year, Microsoft's cloud business has been particularly unstoppable. Over the past four quarters, the division has exploded, with Q2 up 34% year-over-year, Q3 up 23%, Q4 up 30%, and Q1 up 36% in fiscal 2022.
Wedbush analyst Dan Ives told Yahoo Finance: "I don't think investors are fully aware of this story even as they move into 2021, and they don't think there's that much gas in the fuel tank for growth." ”
"Instead, it's actually accelerated because it's a perfect storm of demand." It's moving to the cloud with more businesses. You've seen Azure gain share in competition with companies like Amazon and AWS. Now the stock has begun to be revalued for being a cloud computing company, rather than the traditional Microsoft. It's no longer your grandfather's Microsoft," Ives added.
More room for growth
Nor does Microsoft's cloud computing growth show any signs of stopping. The company now offers cloud-based IT infrastructure, web hosting services, and build versions of Office and its server software.
According to Ives, only 30% of Microsoft's enterprise installation base has shifted to cloud clients, leaving a huge growth opportunity for the future. "In our view, it's not a question of ifs, it's a question of when the company will reach a $3 trillion market cap."
Michael Cusumano, associate dean of the MIT Sloan School of Management, noted that Microsoft is definitely moving toward that goal, and that the company's value has increased by $500 billion in just five months, and that it is now continuing to take all the right actions.
Continue to focus on the future
While Nadella and the company can earn cash by selling their cloud computing products to their existing customer installation bases, Microsoft is continuing to innovate. In April, the company acquired AI pioneer Nuance Communications for $19.7 billion, a move that would benefit everything from Microsoft's healthcare jobs to its customer engagement offerings.
The company also dives into the nascent metaverse through its Mesh Teams software. The idea is for colleagues around the world to participate in virtual meetings using everything from AR and VR headsets to their laptops to create a sense of presence and make them feel like everyone is in the same room.
Meanwhile, Microsoft is digging deeper into its gaming business with XboxGame Pass cloud gaming. Xbox Game Pass Cloud Gaming, a platform powered by Microsoft's own cloud servers, not only marks Microsoft's position as a leader in the transition to cloud gaming, but also ensures that younger users recognize Microsoft's brand name. In addition, it provides potential cloud customers with evidence that Microsoft cloud servers are powerful enough to meet even the most demanding applications.
In addition, due to its more open nature, it has gained a lot of goodwill across the tech industry.
Of course, this does not guarantee that Microsoft's current development trajectory will be maintained. After all, there are plenty of adversaries looking to take it down — whether it's Amazon's AWS, Slack, Google's Workspace, Sony's PlayStation, or SalesForce. For now, however, this software company is one of the most innovative on the planet.