Should I buy Microsoft stock?

This article was updated on September 12, 2017 and originally published on April 25, 2017.

Microsoft (MSFT -0.49% ) managed to do something few companies can achieve.

He radically changed direction, while changing the way consumers perceive his brand. Once, not even that long ago, asking “Should I buy Microsoft stock?” would have met with a definite “no” since the company seemed stuck with a business model that had become obsolete. Now, the question of whether you should buy Microsoft stock comes down to whether you believe in the sustainability of its transformation.

Image source: YCharts.

How has Microsoft changed?

While former CEO Steve Ballmer deserves credit for moving the company into the cloud services business and turning Office into a subscription-based product, Microsoft’s major changes began when Satya Nadella took over. in February 2014. The new CEO accelerated the company’s changes and pioneered many of the business practices the company developed when its Windows operating system (OS) dominated the market.

For decades, Microsoft had a virtual monopoly on the PC market, really dealing only with Apple (NASDAQ:AAPL), which sold its expensive, niche Mac lineup to a small audience. Now, however, Microsoft operates in a world where consumers can opt for Apple products, Android devices, and computers running Chrome OS. Moreover, even the PC itself – the long-standing core of the Microsoft empire – must fight for its relevance in competition with phones, tablets and hybrid devices.

Microsoft has become a different company under CEO Satya Nadella. Image source: Microsoft.

What does this mean for businesses?

Microsoft has made a major change in the way it sells Office, and that, along with the company’s growing cloud business, provides an impressive base of recurring revenue. Under the previous model, people bought a copy of Office or one of its parts (Word, Excel, PowerPoint, etc.). In some cases, this led to the person simply using what they had purchased for a long time. This made them Microsoft customers, but not a permanent source of income.

Under the new model, Office is sold by subscription. This means that once someone buys the productivity suite, they have to keep paying for it every year. On the plus side for consumers, however, instead of a price of over $300 to get in, they only have to pay either $99 for a five-person license (which can be used on five PCs, five tablets and five phones). ) or $69.99 for an individual license.

Essentially, Microsoft has gone from being a car dealership — where it hoped to attract consumers every few years for a major purchase — to a subscription company with perpetual revenue. It’s a model that has worked, and last quarter revenue for the Productivity and Business Processes division (which includes desktop and cloud services) grew 21%, with consumer desktop revenue increasing 13%, and revenue from commercial offices by 5%. These numbers have been moving in the right direction for a full year.

The company’s cloud model is similar, with consumers paying for the service month-to-month. Microsoft’s Intelligent Cloud group, which includes its Azure cloud business, saw an 11% increase in overall revenue in the fourth quarter as Azure revenue nearly doubled year-over-year.

A well-managed and well-positioned company

Under Nadella, Microsoft has become a company with growing revenue streams that are offsetting Windows’ market decline (although that could change as the Internet of Things grows). People who buy Microsoft stock are getting stock in a company that has some certainty built into its model, more like a cable or phone company than a technology company.

They’re also allowing one company to push the envelope with projects like HoloLens, and another to make a major leap in targeted social media with its purchase of LinkedIn. On top of that, Microsoft pays a dividend and has an active stock buyback program in place. In the fourth quarter, the company returned $4.6 billion to shareholders between buying back shares and paying dividends.

Microsoft once looked like a dinosaur doomed to slow decline as companies like Apple usurped it. That’s no longer the case, and investors who buy stocks won’t be getting a relic of the IT past, they’ll be buying a company that has transformed into one of the brands that will power the future.