Get Ready to Profit from Microsoft (Nasdaq: MSFT) Stock's Encore

During its heyday in the 1990s, Microsoft (Nasdaq: MSFT) stock gained an incredible 9,000% - but now that its growth phase is over, mainstream investors are overlooking the once-mighty tech giant. Here's why they're making a big mistake...

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We've talked a lot about the importance of targeting growth stocks as a great way to become financially independent.

In fact, growth is one of the five rules that my tech-wealth-building strategy uses to identify the best profit opportunities.

But you can't ignore "value" stocks - especially since "special situation" plays such as corporate turnarounds can generate windfall gains for your portfolio.

And today I want to reintroduce you to a slumbering tech giant that is the embodiment of a special-situation value play.

For years, this company was the quintessential growth play, a virtual monopoly whose name was synonymous with sector dominance and investment wealth.

But when its growth phase finally ended, this stock fell off the investment radar.

And it's been locked in investment purgatory ever since. Mainstream investors ignore it altogether - or make jokes about the company's eroding core business, famously nerdy cofounder, and the payback it seems to be receiving for its once-bruising business practices.

But not us. We see the huge profit potential ahead...

Ready for a Comeback

I'm talking, of course, about Microsoft Corp. (Nasdaq: MSFT) - the stock market kingmaker of the 1990s.

With its Windows operating system installed on virtually all of the world's PCs - its market share peaked at about 95% - Microsoft was the personal computer revolution.

Microsoft teamed with chip giant Intel Corp. (Nasdaq: INTC) to create the "Wintel" standard, and the duo's bare-knuckled business practices made the PC market uninhabitable for any other chip-and-software standard.

MSFT stockMicrosoft's dominance didn't stop with operating systems, either. With its Office suite of productivity software, the Redmond, Wash.-based company did nearly the same thing in the applications market.

The result: MSFT stock went on a 9,000% ride during the 1990s.

Even the antitrust watchdogs in the United States and Europe failed to derail the Microsoft Express.

Microsoft continues to dominate the PC market. But the PC market is not the dominant force it once was.

With the "dot-bomb" implosion of 2000, the PC market began to slow. From 2001 to 2011, while the tech-heavy Nasdaq Composite Index gained 34%, Microsoft shares plunged 25%.

The company was caught downright flat-footed as folks began trading their PCs for smartphones and tablets.

And most investors have written the company off - or forgotten about it altogether.

Here's why those investors are making a big mistake...

I think Microsoft is getting ready to stage a comeback. The stock is up 11.5% so far this year, and I believe that's the start of a new, long-term surge.

Its financials continue to be rock-steady and predictable: Revenue and profits increase year after year.

Besides beating the Standard & Poor's 500 by nearly 65% so far this year, this company has been quickly moving into mobile computing and other fast-growing tech segments - especially cloud computing.

And it's made a series of crucial moves - including a bold acquisition and an executive change at the top - that can serve as catalysts for even faster growth. Its $50 billion cash hoard and committed dividend policy give this corporate makeover a lot of credibility.

In fact, I see three very strong catalysts at work ...

Special Situation Catalyst No. 1: The New CEO

Satya Nadella belongs to a very exclusive club. Despite the fact that Microsoft turns 40 next year, Nadella became only the third chief executive in the firm's history when he assumed the top spot in February.

A native of India who grew up and was educated in the United States, Nadella is a 22-year veteran Microsoft executive who has already proven his leadership.

Unlike his predecessors, Nadella is a "people person," which means employees will likely line up behind him. Additionally, he thrives not only on success, but also innovation. That's a necessary quality for a company that's looking to switch its main business - and leap on new businesses that may present themselves in the future.

When analyzing a corporate turnaround, I tend to prefer new blood at the top. And by "new blood," I'm talking about an outsider with no ties to current management. But in this case, the Microsoft board seems to have made a very savvy move.

The new CEO has the full support of cofounder Bill Gates, who at the time of Nadella's appointment gave up his post as chairman of the board to become what Microsoft calls a "technical advisor."

Microsoft and Nadella need to keep their strong ties to Gates. He should be a big help in guiding his company through a tremendous period of change.

While Gates is still wildly popular among the company's sprawling work force, news reports quote workers as saying they know they need to change with the times - continuing the move from software to mobile and cloud computing - to ramp up Microsoft's growth.

In other words, Nadella occupies a rare position in the technology industry. He is both deeply rooted in Microsoft's history and is also seen as a visionary change agent. And he has broad support from the company's roughly 100,000 workers.

Nadella is already carving out an image for himself as a decisive leader and as someone more in tune with the needs of investors.

In late April, he won plaudits from Wall Street when he joined a call with analysts to discuss Microsoft's quarterly earnings. It was the first time in five years that a Microsoft CEO had been present on an earnings call.

Nadella has shown me that he understands the challenges Microsoft faces as the shift away from PCs and toward mobile and the cloud continue.

Special Situation Catalyst No. 2: Cloud Computing

Nadella is an expert in the rapidly growing field of cloud computing. Before becoming CEO, he was the executive vice president of Microsoft's Cloud and Enterprise group. Under Nadella, the unit outperformed the overall cloud market.

Forrester Research estimates that the market for cloud computing services - in which customers pay vendors to host data and applications at remote computer centers they can access via the Web - will hit $55 billion by the end of this year. By the end of this decade, that number will climb to more than $241 billion.

It's a great business to be in... and Microsoft already does well in the cloud.

The information technology research firmGartner recently published its ranking of players in the cloud market. Microsoft's Azure cloud platform came in second place, trailing only Amazon.com Inc. (Nasdaq: AMZN). It beat out tech leaders Google Inc.(Nasdaq: GOOG, GOOGL), Computer Sciences Corp.(NYSE: CSC), andIBM Corp.(NYSE: IBM).

And just weeks ago, Microsoft struck a key partnership with Salesforce.com Inc. (NYSE: CRM). The terms were not disclosed, but the alliance blends Salesforce's popular customer relationship management cloud app platform with Office and Windows.

That should give the cloud business a further boost from its impressive fiscal 2014 third-quarter results. Office 365, a cloud offering, now has an annual run-rate revenue of $2.5 billion and grew sales 100% compared with the year-ago results.

Special Situation Catalyst No. 3: The Mobile Revolution

Microsoft is finally coming on strong in the mobile market.On April 25, the company completed the $7.2 billion acquisition of the Nokia Corp. (NYSE ADR: NOK) device business, a move that makes Microsoft a legitimate player in mobile.

Yes, Nadella's predecessor, Steve Ballmer, made the deal. But it's up to the new guy to make it work.

And he's starting from a solid base. Nokia makes 90% of the mobile devices running the Windows Mobile operating system. And in the first quarter, market researcher IDC said Windows smartphones were in third place, with 3.5% market share.

But IDC says Windows phones will see their market share grow at triple the rate of iPhones and double the growth of Google's Androidoperating system. Windows phones could capture as much as 6.4% of the market by 2018.

Nadella is taking no chances. He's making Windows Mobile free for smaller mobile devices. This is a savvy move, because it makes Microsoft competitive in emerging markets that are still in the early stages of smartphone adoption.

IDC says that Android is now the operating system in 78% of all mobile devices worldwide. So, by copying Google's playbook and making its operating system open source, Nadella hopes to see even greater growth in India, East Asia, Latin America, and the Middle East.

Microsoft (Nasdaq: MSFT) Stock's Forgotten Muscle

Besides its moves into the growing cloud and mobile markets, Microsoft offers us sterling financials. Recently trading at around $41.50, MSFT has a $343 billion market cap and forward price-earnings (P/E) ratio of about 14.5, a slight discount from the overall market. It has operating margins of 34% and a return on equity (ROE) of 27%.

Throw in a 2.7% dividend and you have a stock that offers us an excellent yield and the prospect of continuing price appreciation.

If Microsoft shares just got back to their late-1990s highs in the neighborhood of about $60, we'd be looking for a profit of 40%.

But given Nadella's aggressive plans for mobile and cloud computing, I believe MSFT stock will continue to double the market over the next few years - and that's the minimum we can expect to make from Microsoft.

It's time to cash in...

More from Michael Robinson: Everyone loves an interesting story, but emotional responses to a stock can disrupt your analysis. A good set of rules, however, can keep you focused. Here's a simple strategy you can use to find the hottest tech stocks to buy...

About the Author

Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.

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