Satya Nadella, CEO of Microsoft. Image source: Microsoft.
What: Software Juggernaut Actions Microsoft (MSFT 0.15%) fell 13% year-to-date as of June 27 market close, according to data provided by S&P Global Market Intelligence. A weak quarterly report in April that showed bumps in Microsoft’s cloud transition is partly to blame, as is Microsoft’s acquisition plan LinkedIn (LNKD.DL).
So what: Microsoft stock entered 2016 at its highest level since the dot-com bubble more than 15 years ago, so the stock has again risen significantly in recent years.
MSFT data by YCharts.
Microsoft remains heavily dependent on Windows and Office sales, but the company has shifted its business to the cloud in recent years. Office is now sold as a subscription service called Office 365, and Azure, Microsoft’s cloud computing platform, has seen tremendous growth.
This transition is not happening fast enough for investors. Microsoft missed analysts’ earnings estimates and reported a year-over-year revenue decline for its fiscal third quarter as rapid growth in the cloud business failed to offset weakness elsewhere. Windows OEM revenue fell 2% currency-adjusted, and Microsoft’s struggling phone business suffered a 46% drop in sales. GAAP EPS fell 23% year-over-year, while adjusted EPS was flat.
Adding to Microsoft’s lackluster results, the company’s announcement in June of its intention to acquire professional social network LinkedIn for $26.2 billion sent the stock plummeting. LinkedIn will be by far the biggest acquisition in Microsoft’s history, and while the move makes strategic sense, LinkedIn’s willingness to sell for just under its 52-week high suggests Microsoft may have significantly overpaid for the company.
Now what: Microsoft has been quite aggressive in shifting its business to cloud-based products, but investors are getting impatient. Microsoft board chairman John Thompson also grew impatient, telling Bloomberg that he wants the company to move much faster.
Microsoft is still generating huge profits and its balance sheet is teeming with cash. But the business has been disrupted by both the cloud and mobile devices, and catching up in both areas has been a slow process. So far in 2016, investors have become less optimistic about Microsoft’s ability to succeed.
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