Microsoft Turns 40 as Stock Drops to 40

The 40th anniversary of Microsoft's founding is tomorrow, April 4. And in a twist of irony, its stock closed yesterday at just a hair above $40 per share ($40.29 to be precise). While that's still higher than the $35 it was trading at when Satya Nadella succeeded Steve Ballmer, the stock has declined 20 percent since November.

Microsoft's history is among the most interesting growth stories of a company that started with nothing and rose into one of the world's most influential companies. It all started in 1975 when Paul Allen and Bill Gates were able to get its iteration of Basic for the Intel microprocessor-based MITS Altair up and running.

Certainly most Microsoft IT professionals and developers know the rich history behind that but for those who don't (or want to recap those interesting times), you can check out this seven-minute Channel 9 video which recaps some key milestones from 1975. Back then, a gallon of gas was 53 cents and Microsoft's revenues that year were $16,705. Microsoft enjoyed many years as the world's most-valued company until recent years when Apple overtook it -- aided by many mistakes made by Microsoft over the past decade.

Nevertheless since Satya Nadella took over as Microsoft's CEO just over a year ago, the company has remade itself, fully embracing open source and rival proprietary software and services and making mobility and cloud the core of everything it delivers. Nadella defined Microsoft as a "productivity and platforms" company. Investors cheered until January when the company forecasted a weaker outlook for the current quarter, leading to its current stock decline.

Most Wall Street analysts see the current decline as a hold on buying opportunity but there are a handful of skeptics. Among them is Goldman Sachs, which downgraded Microsoft to a Sell on Wednesday. Analyst Heather Bellini in a research note warned that the stock will sit at $38 per share over the next 12 months, below the consensus of $46.97. To be sure, this is a contrarian view but it's worth pointing out the headwinds she sees. Among them:

• Microsoft was buoyed last year by the end of life of Windows XP and there's no equivalent issue that will force upgrades this year.
• The free Windows 10 upgrades will impact Windows licensing revenue.
• There's currently little room for lowering costs .
• PC sales will remain flat.
• Cloud licensing products such as Office 365 have much tighter margins than traditional software.

Bullish reports counter that Microsoft's strong commercial software business is gaining share and its cloud business, backed by strong Azure growth, is showing signs that it'll become a key cash cow in the future. Microsoft's tendency to exceed expectations has tempered some concerns over the lower guidance.

Noting both that the Goldman findings and bullish reports, Morningstar yesterday said it's holding its four-star rating of the company. "Microsoft remains a cash flow juggernaut," the report said. "Generating more than $26 million in free cash flow in the past fiscal year and with more than $85 billion in cash on its balance sheet, the technology powerhouse has the financial flexibility and resources to remake itself."

Microsoft's biggest challenge moving forward is to keep Windows successful, while attracting and retaining new talent that will help the company move into the future, as described by The Economist.

Many dread turning 40 while others relish the milestone. Microsoft appears to have moved passed its own mid-life crisis before turning 40, but time will tell.

Posted by Jeffrey Schwartz on 04/03/2015 at 9:49 AM