I have hated Microsoft's (NASDAQ:MSFT) stock for a long time, but it may be time to take another look.
After over 18 months on the job, the strategy of CEO Satya Nadella is becoming clearer. Cloud saves on both development and delivery costs. Bug fixes go right into production, and cloud infrastructure, which is capital intensive, is cheap to maintain.
The second aspect of his strategy is agnostic. The not-invented-here syndrome of the Ballmer era is gone. The idea that Microsoft must own its customers, and can't hold accounts in common with others, is gone.
The biggest change lies in Microsoft's use of open source. The company is deploying server applications on Linux. The Azure cloud now runs Linux and it is using Linux to take big steps in software-defined networking. Microsoft has even allied with Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Netflix (NASDAQ:NFLX) to create an open source video codec.
MSFT is starting to attract business through Apple's (NASDAQ:AAPL) iOS apps. A Microsoft executive was dispatched to Apple's latest product introduction, running Microsoft productivity applications on the new iPad Pro.
If Microsoft can't beat 'em, in other words, it's now going to join 'em and try to do business that way.
That doesn't mean that Microsoft has completely abandoned consumer electronics. It still makes the Surface tablet and peripherals like keyboards and mice. Its key product, the Xbox One, has been transformed from a home entertainment center back into a gaming device and will introduce a new gaming bundle every day this week. Still, as gaming increasingly moves into the cloud, with online games and social games taking huge hunks of the time market from consoles, Microsoft can cover its retreat with Azure Cloud.
Financial reporting changes aren't usually big news, but in this case it is. MSFT will now report numbers in three segments - productivity, cloud, and consumer. The productivity segment is basically Office and tools like Dynamics. The cloud segment includes enterprise software as well as cloud services. The consumer business will combine Windows with Xbox.
The financial reporting gives visibility into Nadella's underlying strategy, which is focused on different types of customers - office workers, large enterprises, and consumers. The three groups will now compete for resources, and the unit that makes the best case, or delivers the best result, will get the love.
In the end, the purpose of financial reporting is to deliver clarity to both top management and decision makers. The new grouping delivers that to Nadella, and will probably help define his moves going forward.
Does this mean buy Microsoft stock with both hands? No. It means Microsoft is doing a lot of things that make sense, from a customer's standpoint and from a management standpoint. It still needs to execute successfully on this new strategic concept.
A lot will be revealed when Microsoft reports earnings October 24 based on the new financial reporting structure. I'm not expecting any big surprise. You have time to get in.
But it's finally time to start looking at doing just that.
Disclosure: I am/we are long AAPL, GOOGL.
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.