Microsoft And Satya Nadella: Seems Like A Good Fit After Three Years

John M. Mason profile picture
John M. Mason


  • In the summer of 2015, Microsoft CEO Satya Nadella took some major changes that helped his to put the Steve Ballmer years behind him and the company.
  • Since then, Microsoft has maintained a return on shareholder's equity in excess of 25 percent, but more important, investors now see Mr. Nadella moving the company beyond its legacy software.
  • The evolving focus of the company is now on artificial intelligence, the "next big thing," which is built upon the foundation of machine learning, and, cloud and mobile computing.

In February 2017, Satya Nadella will have been the Chief Executive Officer of Microsoft Corp. (NYSE: NASDAQ:MSFT) for three years.

He followed a very disappointing Steve Ballmer who basically got the stock to do nothing in his tenure at the position. Ballmer just could not seem to "pull it together" in spite of the good numbers that Microsoft posted year-after-year.

Microsoft's return on shareholder's equity was sky-high during Mr. Ballmer's time as CEO, ranging from the 20s to the high 40s. But, investors took his time there as basically holding the fort, contributed little to enhancing the franchise.

Basically, the Microsoft stock price flat-lined during Mr. Ballmer's tenure.

So, a lot of investors held their breath at the appointment of Mr. Nadella to the position of CEO.

Was Microsoft just a legacy company, living off of what had been created before?

With nearly three years under his belt, investors believe that Mr. Nadella is delivering the results wanted.

And, the stock price shows this, as it has moved from around $35 per share in February 2014 to $63.54 at the market close on December 21 2016, an increase of more than 80.0 percent.

I haven't written about Microsoft for a long time…July 22, 2015 to be exact. The reason for writing something at that time was the occasion of Microsoft posting a $3.2 billion loss. This was the largest loss that Microsoft had ever posted.

"The loss came about because of previously announced charges and layoffs amounting to $8.4 billion. Much of these charges were associated with the acquisition by the company's mobile-phone operation from Nokia Corp. (NYSE:NOK)."

This action seemed to represent the fact that Microsoft was, in some way, a turnaround situation and the new CEO was getting rid of the past mistakes made by the former leadership and was moving into the future with a clean slate.

The move came 18 months after he took over as CEO, probably the earliest he could make this move, given the size and complexity of the company.

Funny to think that a company needs to go through a turnaround when it is earning a 28.4 percent return on shareholder's equity: but, it was a turnaround situation and this action pointed to the baggage that Mr. Ballmer had left for his predecessor.

I wrote at the time "I am encouraged by what Microsoft has done. As some of the readers of this post know, I have experienced a growing respect for current Microsoft CEO Satya Nadella. Mr. Nadella has been at this post since February 4, 2014. His task has been enormous. He has faced the need to change Microsoft and take it to the next level."

And, he has.

The company still posted a 27.3 percent return on shareholder's equity. Not bad.

In his next fiscal year, which ended on June 30, 2016, Microsoft posted a 31.0 percent ROE, and analysts are forecasting that the return for the fiscal year ending on June 30, 2017 will be somewhere in the neighborhood of 31.0 percent.

Since these kinds of returns seem to be expected of Microsoft, the real important story is that investor confidence has returned and the stock price has reached new highs.

This confidence seems to be focused upon the fact that Microsoft has regained direction again and that it is back among the leaders in the industry defining the future.

The latest thrust of Mr. Nadella and his Microsoft team seems to be in the area of machine learning, which is, of course, the foundation for the more esoteric field of artificial intelligence.

Over the past 15 years or so, cloud computing and mobile computing have dominated the latest and greatest "new" thing in this space, and with these developments "huge processing and data-gathering power" have been brought to handheld devices.

Artificial intelligence will tie all of this together in one big package. Artificial intelligence "has become the tech industry's most vaunted new thing."

There is still much work to do and competition to be the leader in the field is quite fierce. There are even organizational questions that must be dealt with because of the cross-field nature of the final product. And, speed of development is a necessary part of the creation of the platform from which the surviving innovation will work from. This platform will be composed of many moving parts.

The crucial thing for Microsoft, however, is that Mr. Nadella appears to be in control and that there is a vision for people to work toward. And, this perception is being translated into the performance of the company's stock.

The plentiful return on shareholder's equity continues, but unlike in the Ballmer era, there seems to be more to the results that just maintaining the legacy market position.

It seems to me to be appropriate for me to quote one of the conclusions I reached in my earlier post: Mr. Nadella "still has a ways to go, but my respect for him is growing because of the pace that he appears to be working at."

This article was written by

John M. Mason profile picture
John M. Mason writes on current monetary and financial events. He is the founder and CEO of New Finance, LLC. Dr. Mason has been President and CEO of two publicly traded financial institutions and the executive vice president and CFO of a third. He has also served as a special assistant to the secretary of the Department of Housing and Urban Development in Washington, D. C. and as a senior economist within the Federal Reserve System. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania and was a professor at Penn State University and taught in both the Management Division and the Engineering Division. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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