Microsoft (NASDAQ: MSFT) has managed to do something few companies can pull off.
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It has dramatically changed its direction, while also altering how consumers see its brand. Once, not even all that long ago, asking "Should I buy Microsoft stock?" would have been met with a resounding no since the company seemed stuck in a business model that had become outdated. Now, the question of whether you should buy Microsoft stock comes down to whether you believe in the staying power 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 for him in February 2014. The new CEO accelerated the company's changes and cast off many of the business practices the company developed when its Windows operating system (OS) dominated the marketplace.
For decades, Microsoft had a near-monopoly on the PC market, really only having to deal with Apple (NASDAQ: AAPL), which sold its pricey, niche Mac line to a small audience. Now, though, Microsoft operates in a world where consumers can opt for Apple products, Android devices, and computers running the Chrome OS. In addition, even the PC itself -- the longtime core of the Microsoft empire -- has to fight for relevancy in competition with phones, tablets, and hybrid devices.
Microsoft has become a different company under Nadella. Image source: Microsoft.
What does this mean for business?
Microsoft has made a major change in how it sells Office, and that, along with the company's growing cloud business, provides an impressive base of recurring revenue. Under the previous model, consumers bought a copy of Office or one of its parts (Word, Excel, PowerPoint, etc.). In some cases, that led to the consumer simply using what they bought for a long period of time. That made them Microsoft customers, but not an ongoing source of revenue.
Under the new model, Office is sold on a subscription basis. That means once someone buys the productivity suite, they must continue to pay for it every year. On the positive side for consumers, though, instead of an over-$300 price to get in the door, they only have to pay either $99 for a five-person license (which can be used across five PCs, five tablets, and five phones) or $69.99 for a one-person license.
Essentially, Microsoft has moved from being a car dealer -- where it hoped to lure consumers back every few years for a major purchase -- to a subscription company with perpetual revenue. It's a model that has been working, and Q2 revenue in the Productivity and Business Processes division (which includes office and cloud services) was up 10%, led by a 22% increase in consumer Office revenue.
The company's cloud model is similar, with consumers paying for the service month after month. Microsoft's Intelligent Cloud group, which includes its Azure cloud business, saw an 8% increase in overall revenue in Q2, with Azure's revenue nearly doubling year over year.
A well-run, well-positioned company
Under Nadella, Microsoft has become a company with growing revenue sources that offset the declining market for Windows (though even that could change as the Internet of Things grows). People who buy Microsoft stock get shares in a business that has built some certainty into its model, more like a cable or phone company, than a technology one.
They also get a company pushing boundaries with projects like HoloLens, and one making a major push into targeted social media with its purchase of LinkedIn. On top of that, Microsoft pays a dividend and has had an active share repurchase program. In Q2 alone, the company returned $6.5 billion to shareholders between buying back shares and dividend payments.
Microsoft once looked like a dinosaur doomed to a slow decline as companies like Apple usurped it. That's no longer the case, and investors who buy shares won't be getting a relic of computing past, they'll buying into a company that has transformed into one of the brands that will power the future.
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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Daniel Kline owns shares of Apple and Microsoft. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.