Why Microsoft Stock would benefit from an Azure spin-off

Microsoft (NASDAQ:MSFT) currently offers old-fashioned solutions that are growing relatively slowly (Office and Windows) and new cloud solutions that are growing enormously (Dynamics 365 and Azure). If the company remains in its current form, Microsoft shares will continue to grow steadily. But because the company’s total results will never grow more than 30% or 35% per year, stocks will never produce truly huge returns.

But that would change if the company moved away from its rapidly growing cloud business. In such a scenario, the current owners of Microsoft shares would receive shares of a leading cloud services company (let’s call it “Azure”) and shares of a company focused on providing older, mostly based software. on PCs, businesses and consumers.

Azure stock is likely to achieve a multiple futures price / earnings multiple at least as high as that of Sales force (NYSE:CRM) 60, compared to Microsoft’s current multiple of 29. And Azure stock could easily quadruple about in a year or two, like other tech highlights like Shopify (NYSE:STORE) and Twilio (NASDAQ:TWLO) have in the past. Over a five-year period, an Azure spinoff could easily generate the kind of huge profits that Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) have in recent years.

Meanwhile, the company focused on legacy software products, which could retain the Microsoft name, would still be hugely profitable. He would still generate significant growth and keep some products, like Teams, GitHub, LinkedIn, and Xbox. These are all products that investors would always find at least somewhat exciting. Moreover, since it would still be very profitable and would not have to invest too much in R&D, relative to its free cash flow, it could pay a very high dividend, which would make it ideal for income investors. .

Microsoft’s Braintrust Could Be More Targeted

In the fallout scenario, current Microsoft CEO Satya Nadella would be in the best position to become CEO of Azure. After all, under Nadella, Microsoft’s cloud revenue grew significantly, and its cloud infrastructure business became the second in the world, behind Amazon Web Services. Obviously, Nadella, who was previously Microsoft executive vice president cloud computing company, knows what it does when it comes to running cloud computing companies.

But I think Nadella and her key strategic and technical leaders would do an even better job of growing the company’s emerging and high-growth cloud business if they could focus on that, rather than having to worry about many other activities as well. For example, according to my scenario, Nadella and her main strategic and technical lieutenants could personally develop and oversee Azure’s artificial intelligence (AI) strategy on a daily basis.

I doubt that is currently possible. Likewise, I think Azure and Dynamics 365 could adopt new technology faster and more efficiently and expand into new areas if they weren’t part of a huge tech conglomerate.

Overcome Objections

When Nadella first became CEO, at a time when Azure was still a relatively nascent company, there were rumors that Microsoft would split into a consumer-oriented company and a business-oriented enterprise.

It is difficult to see the reason for such a split. As Nadella pointed out, there are a lot of people who use Windows and Office both at home and at work, so it wouldn’t have made sense to divide the sales, customer service and administration teams of the company. in this way. And, of course, there wasn’t much of a difference between Windows and Office for consumers and the same apps for businesses.

But some skeptics, modifying Nadella’s appeal in 2014 so that the company “tackles [all] users ”, may object to the company losing its ability to cross-sell Windows, Office, Azure and Dynamics 365.

However, I don’t think the cross-sell ability has to necessarily go away as a result of a split. To my knowledge, there is no law or rule that prohibits Azure and Microsoft sales teams from sharing customer information and selling their products to each other, even though they would technically work for two separate companies. . I don’t even think there is a law or rule that prohibits one person from leading the sales teams of both companies.

So I think it would be quite possible for the company to keep most or all of the benefits of being under one roof while still having all of the benefits of being separate.

The result on Microsoft Stock

In its current form, Microsoft stock will continue to rise steadily and generate admirable returns for its shareholders. But it will only be able to generate the kinds of returns Amazon and Netflix have generated in recent years if it divests from its new cloud business. Current shareholders or a new activist investor should request such a split.

As of this writing, Larry Ramer does not hold any position in any of the aforementioned stocks.