Just under a year ago, Capital Wave Forecast Editor Shah Gilani said it was time to buy Microsoft Corp. (NasdaqGS: MSFT).
It was a surprising call. The once-great software giant had become a moribund also-ran, and Wall Street clearly saw no future for the Redmond, Washington-based company.
As is so often the case, Wall Street was wrong.
Microsoft shares are up 40% in the last year, and still some of the pros seem reluctant to believe in the turnaround.
But it's a new day for Microsoft. Satya Nadella is firmly in charge from the corner office. He's setting the new tone and company direction, and he announced a massive layoff last week that sent shares surging.
And now comes the payoff, as MSFT's earnings take center stage on Tuesday. All of which makes it a great time to revisit this call on Mr. Softy.
The Upside for Microsoft Is Huge
Resident tech expert Michael Robinson also believes there's more to come for Microsoft…
Microsoft was a true stock-market "kingmaker" throughout the 1990s. After a long stretch in stock-market purgatory, it's emerged as a "special situation" turnaround play with a hefty upside.
"You know, Bill, most investors have written this company off – or have forgotten about it altogether," Michael told me during a late-night telephone call the other day. "It's become something of a 'wallflower' stock. But Shah made a great, great call … and I think Microsoft is going to show us something very special. The stock is up nearly 20% this year; it has a $50 billion cash hoard, and a committed dividend policy. It has a new CEO. And it just spent $7 billion in a big buyout. It's the kind of corporate turnaround play that I just love."
To understand why the pros just don't seem ready to "believe" in this rebound – and to fully grasp the opportunity at hand – we need to take a look at Microsoft's past.
A Fond Remembrance of Those Halcyon "Wintel" Days
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.
Microsoft's dominance didn't stop with operating systems, either. With its Microsoft Office suite of productivity software, the Redmond tech titan did nearly the same thing in the applications market.
The result: Microsoft's shares went on a 9,000% ride during the 1990s.
Today, Microsoft continues to dominate the PC market. But the PC market is not the dominant force it once was.
"If you think back, Bill, so dominant was Microsoft that it drew the attention of government anti-trust watchdogs in both the United States and the European Union," Michael said. "All the lawsuits – designed to curb Microsoft's bullying of other, smaller companies – did virtually nothing to derail the Microsoft Express. But Microsoft's mastery of its markets and the slowing growth rate in the PC market that followed the dot-bomb implosion of 2000 ended the years of eye-popping increases. The decade that followed taught Microsoft investors a very hard lesson: The market doesn't reward companies that rake in profits but show only modest rates of growth. That's why the Street has written the company off."
But we haven't and here's why….
These Catalysts Power Microsoft's Gains
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.