Satya Nadella is the new Chief Executive Officer of Microsoft (NASDAQ:MSFT). I wish Mr. Nadella the best wishes in the world for his success … and for the success of Microsoft.
In saying this, I am not changing a thing I wrote in my post of yesterday, "A Red Flag at Microsoft." Mr. Nadella has his work cut out for him.
I just hope that he has learned something from the tenure of his predecessor, Steve Ballmer, and pays attention to what investors are saying about the price of the Microsoft stock.
Mr. Ballmer took over as CEO of Microsoft in January 2000. During his time at this position, Microsoft never earned a return on shareholder's equity of less than 15 percent. This is an excellent record.
But, the price of Microsoft's stock basically "flat-lined" Mr. Ballmer's time as CEO. The "market" may be wrong over the short-run, but over thirteen years … I don't believe so.
In my opinion, investors were saying that earning a 15 percent return on equity over thirteen years is all well and good, but what have you done for me lately.
Microsoft has had a near monopoly in its product space. Microsoft created a network that had sufficient barriers to entry to maintain its position in its market for all of this time. Shareholders got rewarded for investing in this company as Microsoft established itself and produced its network.
The investment community, in my mind, has been saying that Microsoft has done little since to create anymore shareholder value … everything it has done since has basically covered its opportunity costs, included it opportunity cost of capital.
It has piled up mounds of cash … but has done little or nothing with its cash flows to generate additional wealth. The stock price has "flat-lined" Mr. Ballmer's tenure.
One of the things I have experienced in my professional career is too many CEOs claiming that the "market" does not understand them … and what they are leading the company towards.
In other words, the price of the stock of the company that the CEO runs is too low. If the market really understood what the CEO was trying to do, the stock price would be much higher.
In my experience, in most of these cases, the "market" has been correct and it has been the CEO that has not understood what the company needs to do.
One of the major things Warren Buffett seems to look for in the companies he invests in is this: he looks to see how the person that is running the company uses retained earnings. If the person running the company cannot use the retained earnings that is being generated to cover opportunity costs, especially the opportunity cost of capital, Mr. Buffet will not invest in them.
This, I believe, is an important lesson. Now, back to Microsoft.
Microsoft has a new CEO. A good CEO is not always correct in the decisions he or she makes. But, the good CEO learns from his or her mistakes and learns from the mistakes of others.
Hopefully, Mr. Nadella comes to office with this ability. He starts today. Let's hope that he has learned … and that he puts his learning to good practice. Furthermore, Microsoft has a new chairman. As I stated in the post cited above, I believe that this is a good first step.
Good luck Satya! Microsoft stock opened down after the news was released.
Disclosure: I am long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.