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Can Microsoft's New CEO Make a Difference?

8 February 2014 in Trading Ideas

Microsoft can still make news after all.

Earlier this week, the company named Satya Nadella as only its third chief executive in the company’s 39-year history.

As the Financial Times noted, the naming of company veteran Nadella ends a search that began in August and initially involved more than 100 candidates.1

The rise of Nadella, who had headed the company’s cloud computing and enterprise business, has implied to many that the company is staking its future on what the cloud can and will deliver.

As the FT put it, Microsoft has been sidelined by the rise of mobile computing and the Internet, which has put Google and Apple to the forefront of the tech industry and forced a management overhaul at Microsoft as it has struggled to play catch-up.

Nadella essentially confirmed the end-game going forward, telling Microsoft employees in an email that “we must zero in on what Microsoft can uniquely contribute to this world. [This] will require us to reimagine what we have done in the past for a mobile and cloud-first world.”

While Nadella’s longtime predecessor as Microsoft CEO, Steve Ballmer, also was repositioning the company around the cloud and mobile computing, Nadella seems to be signaling a shift away from hardware and instead newly emphasizing software, the FT said, in particular the new cloud-based computing platform and applications the company has built to succeed its traditional PC business.

That said, by choosing a longtime Microsoft veteran the company’s board was indicating its preference to have a known quantity continue to carry the torch.

“Look, what Microsoft did by picking Nadella is to say ‘We don’t want to change the core strategy that the board just set,'” Hardeep Walia, CEO of Motif Investing and a former Microsoft executive told Bloomberg Television on Monday. “We need someone to jump in and operate.”2

Walia also noted that despite appearances of a “safe” choice in Nadella, the company does intend to innovate, both with Internet-based software-as-a-service and cloud-based computing technology.

And, as Walia pointed out, Nadella has already been driving the company’s top business. “Satya controls 55% of the revenue and two-thirds of the profits.”

Going forward, the company’s path forward is continuing the transformation of their two cash cows – Window and Office, Walia said. “But like any innovator’s dilemma,” he asked, “it’s how do you milk the cows and feed these growth opportunities.”

cloud computingWhere Nadella faces his biggest threats, Walia said, is in mobile (“they have to get mobile right – 4% share”); their cloud strategy, where Walia said they are playing catchup with Amazon and others; and what, ultimately, the company is going to do with its consumer business. (“Are they going to keep playing in Bing?”)

The Cloud Computing motif, which does not include Microsoft as a holding, is down 1.6% in the past month. The S&P 500 is off 3.3% in that same time frame.

In the past 12 months, the motif is up 25.7%. The S&P 500 has gained 19.3%.

1Richard Waters, “Microsoft banks on the cloud under Nadella, FT.com, Feb. 4, 2014.

2Bloomberg TV video, “Bloomberg Surveillance,” Feb. 3, 2013, http://www.bloomberg.com/video/yellen-takes-over-surveillance-02-03-r0tLEoaDT3KPlCG89sVaUw.html.