Microsoft (MSFT) has had a stunning year. After nearly 50 years in business, the tech giant crashed through the $2 trillion market capitalization mark in June, joining an exclusive club that includes Apple and, for a brief moment, Google parent Alphabet. As of Dec. 6, Microsoft was worth a staggering $2.4 trillion.
Over the last 52 weeks, Microsoft’s stock price has skyrocketed 45%, easily outpacing the broader S&P 500, which rose 21%, not to mention rivals Apple (AAPL) and Amazon (AMZN), which saw their stock prices increase by 23% and 5.5%, respectively.
The company’s financial reports were just as impressive as its market cap. Over the last 12 months, the software giant has reported a whopping $176 billion in revenue — a nearly 20% year-over-year increase.
But Microsoft has always been a cash cow. It operates in the high-margin software sector.
[See also: What we get right, and wrong, with our Company of the Year]
What’s truly impressive is that, under CEO Satya Nadella, the 46-year-old company is branching out and thriving in new businesses including cloud computing, connectivity apps like Teams, and social apps like LinkedIn.
Equally remarkable is that Microsoft has flourished while avoiding the public backlash or antitrust scrutiny its Big Tech peers like Amazon, Facebook (FB), and Apple have faced. It’s for those reasons and more that Yahoo Finance has named Microsoft its Company of the Year for 2021.
Microsoft reinvented itself by cannibalizing itself
Bill Gates and Paul Allen founded Microsoft in 1975, creating what would go on to become the world’s most widely used operating system. Gates remained CEO for decades until he stepped aside in 2000 and Steve Ballmer took the reins. The duo saw Microsoft through a number of major product releases and challenges, the most significant of which was Microsoft’s antitrust battle with the Justice Department that ran until 2002.
[See also: Why Microsoft avoided antitrust scrutiny that plagued other tech giants in 2021]
And while Microsoft is a reborn tech giant in 2021, the distraction caused by its antitrust fight and a series of miscues meant it spent years fighting for relevance among its Big Tech peers.
Microsoft failed to penetrate the smartphone market, despite spending more than $7 billion to buy Nokia. While LinkedIn has performed well, Microsoft’s social media capabilities are still dwarfed by Facebook And when was the last time you tried to Bing your own name rather than Google (GOOG, GOOGL) it?
But in 2010, the company launched Azure, a version of Windows powered by the cloud, and it hasn’t looked back. It’s now one of the world’s largest cloud providers, offering the latest cloud services and coming in second in market share only to Amazon’s Amazon Web Services.
Those efforts, however, required Microsoft to reinvent itself. Rather than peddling individual pieces of software, it began selling subscriptions that generate recurring revenue. While the individual sales provide more short-term revenue, subscriptions bring in more cash overall.
Its Office products, for instance, are now primarily available as cloud-based products for both commercial and consumer applications. And in fiscal Q1 2022, that meant revenue growth of 18% and 10% for the commercial and consumer businesses, respectively.
[See also: How Microsoft saved itself from social media scrutiny]
“For so long, [Microsoft] resisted cloud computing and opening up their software and running it on other devices because they thought it would cannibalize Windows, because that was their profit machine,” University of Pennsylvania Wharton School senior fellow Scott Snyder told Yahoo Finance.
“Everybody at that time saw cloud as this nascent business,” said Snyder, author of “Goliath’s Revenge: How Established Companies Turn the Tables on Digital Disruptors.”
But Nadella — who helped nurture Microsoft’s cloud business before becoming the company’s third CEO in 2014 — saw the opportunity. And it’s the cloud that pushed Microsoft over the $2 trillion mark in 2021, according to analysts.
“But then you start to add in these other things they're bringing in whether it's LinkedIn, whether it's other types of platforms that can allow people to start to build on Microsoft Solutions. They're really set up well to help enterprises for digital transformation for a long time,” Snyder added.
While Microsoft had roughly 20% of global cloud market share in 2020 behind Amazon’s 41%, the software company is slowly gaining on the Everything Store.
Microsoft’s cloud business has been particularly unstoppable in the past year. Over the last four quarters, the segment has exploded with year over year increases of 34% in Q2, 23% in Q3, 30% in Q4, and 36% in fiscal Q1 2022.
“I think investors under appreciated the story even going into 2021, thinking there wasn't that much gasoline left in the growth tank,” Wedbush analyst Dan Ives told Yahoo Finance.
“Instead, it's actually accelerated, because it's a perfect storm of demand. It's with more enterprises moving to the cloud. You've seen Azure gain share versus the likes of Amazon, and AWS. And the stock has now started to get rerated on being a cloud company, rather than the traditional Microsoft. It's no longer your grandfather's Microsoft,” Ives added.
Even more room for growth
Microsoft’s cloud growth doesn’t show any signs of stopping either. The company now offers cloud-based versions of IT infrastructure, web hosting services, and Office, as well as on-premises versions of its server software.
According to Ives, only 30% of Microsoft’s enterprise install base has shifted to the cloud, leaving an enormous growth opportunity ahead.
“In our opinion, it's not a matter of if, it's when this company hits a $3 trillion market cap,” he said.
It’s certainly on its way there, adding $500 billion to its value in just five months. And the company is continuing to make all of the right moves, explained Michael Cusumano, deputy dean at MIT’s Sloan School of Management.
“They're growing again, because usage of the cloud has been growing,” Cusumano said. “They’re in some very powerful positions.”
Microsoft continues to look to the future
While Nadella and company could kick back and rake in the cash by selling its cloud offerings to its existing install base of customers, Microsoft is continuing to innovate. In April, the company purchased AI pioneer Nuance Communications for $19.7 billion, a move that will benefit everything from Microsoft’s healthcare efforts to its customer engagement offerings.
The company is also diving into the nascent metaverse space through its Mesh Teams software. The idea is to have colleagues located around the world participate in virtual meetings using everything from AR and VR headsets to their laptops, creating a sense of presence and making it feel like everyone is in the same room.
At the same time, Microsoft is digging deeper into its gaming business with its Xbox Game Pass cloud gaming, a platform powered by Microsoft’s own cloud servers. The service not only marks Microsoft as a leader in the shift to cloud gaming, but it also ensures younger users recognize the Microsoft nameplate. It doesn’t hurt that it also provides potential cloud customers with proof that Microsoft’s cloud servers are robust enough for even the most demanding applications.
And thanks to its more open nature — you can find Microsoft products on most any operating system — it’s gained plenty of goodwill across the tech industry.
Of course, there’s no guarantee that Microsoft’s current trajectory will hold. After all, plenty of rivals hope to knock it from its pedestal — whether that includes Amazon’s AWS, Slack, Google’s Workspace, Sony’s PlayStation, or SalesForce.
For now, however, the once under-the-radar software company is among the most innovative companies on the planet.
More from Dan:
Nvidia’s $40 billion Arm deal is all but dead — but it’s not a huge loss
Twitter CEO Jack Dorsey steps down, CTO Parag Agrawal tapped to replace him
Nvidia’s latest earnings report is the ‘nail in the coffin’ for $40 billion ARM deal: Analyst
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, YouTube, and reddit
Got a tip? Email Daniel Howley at [email protected] over via encrypted mail at [email protected], and follow him on Twitter at @DanielHowley.