
Microsoft Shares Soar to Record on Earnings Boost From Cloud - matco11
https://www.bloomberg.com/news/articles/2016-10-21/microsoft-shares-poised-to-hit-record-high-boosted-by-cloud
======
hollerith
>The shares surged as much as 5.6 percent to a record $60.45. The last time
Microsoft was trading near that level was in 1999.

Using share price is suboptimal because the number of shares outstanding has
decreased significantly since 1999. Better to use market cap (which is share
price times the number of shares outstanding).

(According to wikipedia) Microsoft reached a market cap of $618.9 billion in
December 1999, which is $879 billion in 2015 dollars. In contrast, Microsoft's
market cap today is significantly less, namely, $447.5 billion.

BTW, in Feb 2015, Apple reached a market cap of $775 billion. Since the
computing industry's share of the economy was significantly lower in 1999 than
it was in 2015, the data on market caps suggests that the 1999 version of
Microsoft was significantly more dominant over the industry than the 2015
version of Apple was.

~~~
ucha
You understand though that if MSFT had 100B USD in cash and spent it all in
stock repurchase, then, in theory, its stock price wouldn't move but its
market cap would go down by 100B. The market cap is not a perfect indicator of
the value of a business either.

If we start to nitpick, why not calculate share price in real dollar terms
(take inflation into account), adjust for the average P/E ratio of US stocks,
adjust for dividends etc...

That quote is just trivia.

~~~
arcanus
> if MSFT had 100B USD in cash and spent it all in stock repurchase, then, in
> theory, its stock price wouldn't move but its market cap would go down by
> 100B

? In the process of buying shares back, the market capitalization would
increase due to the increase in share price. The share price would absolutely
move. This is why companies have stock buy-backs, in order to pump up the
share price.

The 'buyback ratio' is the amount spent on buybacks in the past 12 months as a
percentage of the company’s market capitalization, and is often used as a
means to flag companies that are acting in a manner such as this.

The market capitalization is just share$ * # of shares. Did you mean book
value? The book value of a company would reduce if you burned 100B in share
repurchases, but even then I don't think it would be so simple, as that 100B
in shares would now be listed as assets to the company and could be used as
remuneration for the employees, among other things.

~~~
tedsanders
If the company ends up with less cash, then its market cap should be lower,
not higher.

When a share is bought back by a company, accountants handle it by either
cancelling the stock or turning it into treasury stock, which has negative
equity value to cancel out its positive nominal value. In either case, the
repurchased stock does not add value to the company.

To illustrate the point, consider creating a company that consists of three $1
bills. You create three shares of the company and sell them to three
investors. Assume that the market is efficient and that each share is valued
at $1. Let's imagine the company's balance sheet. It has $3 of assets (cash)
balanced by $3 of equity (stock). Now the company decides to spend $2 on share
buybacks. It spends $2 of its cash pile buying two shares from two investors.
Let's look at the balance sheet now. It has $1 of assets left (cash) balanced
by $1 of equity (the remaining outstanding share). If you like, you can
optionally record the two shares the company bought as treasury stock, so that
the equity is $3 of stock and -$2 of treasury stock, for the same total of $1
outstanding stock.

As you can see, the value of the company falls when it executes a share
buyback. This makes sense, because after the buyback, the company is poorer.

~~~
joshjje
That was a pretty good ELI5, thanks.

------
Bud
Even as a longtime Apple fan and inveterate Microsoft-hater, I have to hand it
to Satya Nadella and Microsoft as a whole. Their success is deserved. I work
with basically the full range of Microsoft products in my job and what I see
is that everything has improved lately. Windows is better, Office is better,
their cloud offerings are better, and even the Surface is better.

Now, if they would only improve the licensing process for Windows so that it
doesn't drive people insane, that would be amazing.

~~~
mattnewton
I was with you until the "windows is better part" Windows 10 has been the
worst desktop experience I have ever encountered. From day 1 I have had driver
issues, forced updates, no matter how I configure the time zone resets to GMT
(which is great because it uses 3am as a time to restart and force installing
updates). To say nothing if the awful UI. I had none of these issues with
Ubuntu and I paid Microsoft for this headache so I could play games. I can't
wait for more AAA Linux support, please take it home Valve.

~~~
hbosch
I have worked mainly on OSX for my career, and recently had to switch to
Windows for VR work. I started on Windows 7 and absolutely hated it. I hated
the visual style of it, the awful UX of it, and just found it to be painful
all-the-way-around. Sitting down at my desk in the morning, I'd almost always
utter a small sigh of frustration just logging in.

When we finally got cleared by IT to go ahead with Windows 10 I was cautiously
optimistic but after using it for a few months I was totally bought in. I
will/would never go back to any pre-10 release.

I'm back on OSX now (new job) and still miss Windows 10 most days. I'm going
to be building a personal machine soon, and unless the new MacBook Pro's can
astound me it'll be a Windows 10 rig – no question.

~~~
return0
Interesting. I have the opposite opinion. My measure of quality is how quickly
i can do common tasks, and i found that Win10 gets in the way so much, that i
am now installing win7 in my new laptops. Imho win7 hit a gold standard for
usability in many years

~~~
jlgaddis
Off-topic: Is it now possible to keep a Windows 7 machine on W7 and fully
prevent it from being upgraded to 10 (without an absurd amount of effort being
required)? My daily usage is probably 90% Linux/10% Mac but recently I've been
considering setting up a W7 VM on my laptop. I do _NOT_ want W10 at all,
however, and don't want to even bother if it's just going to end up with W10
anyways (I've heard plenty of "forced upgrade" horror stories). If it matters,
this would be a W7 Pro volume license.

~~~
return0
[https://www.google.gr/search?q=prevent+windows+10+upgrades&g...](https://www.google.gr/search?q=prevent+windows+10+upgrades&gws_rd=cr,ssl&ei=3ksLWJvNFMfoUoL7tRg)

I don't even remember if i followed said procedure, but my win7 installs no
longer beg to be upgraded. Maybe MS pulled back its aggressive policy (also, i
m in europe).

------
apapli
There are a few comments on this thread about people disputing microsofts
cloud revenues. I've got no extra intel or inside knowledge, however what I am
seeing in the market suggests to me MSFTs cloud numbers are probably near to
what they claim.

I lead sales and marketing at a small Microsoft partner. Even though we are an
edge case we haven't lost a deal against salesforce.com for quite a while, and
I am hearing similar reports from other established Microsoft partners here in
Australia.

The combination of Dynamics CRM Online / Dynamics365 with the broader stack
(BI, office365, azure) is extremely compelling to businesses.

And at a third of the price of salesforce licensing all we needed to have done
was equal them to win the deals.

As Microsoft goes up look out for salesforce going down. They did a great job
and set the gold standard, but the market has caught up and overtaken them
now.

~~~
mrebus
I've been trying to find Microsoft azure sales for years. As it is cool tech
but could never figure out is it was actually selling. This report is no
better in its obfuscation. First they state 12bil annualized run rate, ie they
made 1 billion in june their best month. then they say "we are on track to
achieve $20 billion in commercial cloud annualized revenue run rate in fiscal
year 2018.". why not say actual revenue but that's just me. but the kicker is
I suspect that a large chunk of this revenue is office 365. and can office 365
really be considered new revenue source and not just a migration from other
office sales.

~~~
apapli
I'd say it's both a new revenue source and migration. But what is wrong about
that?

------
fnbr
Microsoft has been doing an incredible job lately. With the announcement of
native support for Ubuntu binaries, I've been excited to try Microsoft
products for the first time.

Additionally, as someone who writes a lot of bash scripts, I'm excited that
I'll be able to use them across platforms. The two main reasons I use Apple
computers instead of Windows are build quality & the UNIXy background of
macOS, and with their recent moves, they remove the last reason as a
differentiating factor.

Even their cloud offerings are exciting. I use R to do a lot of statistics
work, and now Excel has support for integrating R scripts hosted on Azure.
This makes it much, much, much easier to get R code working in an enterprise
setting, which has been a major hurdle for me previously.

~~~
IndianAstronaut
Have you tried SQL Server R integration? Wondering if it helps to scale up R.

~~~
fnbr
No, I haven't had the right project come up (I'm a statistical consultant, so
my projects are largely determined by my clients).

I've heard really good things about it though. It's supposed to scale well.

It's on the list as something I plan to use in the near future. We've had
projects in the past where we shipping Excel workbooks that had VBA written to
integrate with R from the command line, which is a horrible thing to do to
both Excel and R. Replacing that with a cleaner integration will be nice.

------
samfisher83
If you look at the numbers their cash over the past few years have been
relatively stable about ~24 billion in FCF. Now if we model that as a
Perpetuity with 10% rate which has been historical rate of the market we get
24/.1=240 (not including inflation) if we add Net Tang Assets and some tax
benefits if we write down goodwill we we end up with 56billion. However MSFT
is trading for 450 billion. Where is this extra 150 billion coming from? Cloud
has about 10% margin I don't see how the numbers add up.

~~~
fanzhang
In this era of low interest rates, you might model the above with a 7% rate
instead of 10%, and then you get closer.

~~~
samfisher83
You don't use interest rates you use a discount rate. Basically what you can
earn with that money if you invest in the market.

~~~
dharmon
He's saying that in this low interest rate environment investors are not
demanding 10%, but would rather be happy with something like 7 or 8% as their
hurdle rate.

In finance speak, MSFT's cost of capital is dependent on the risk-free rate,
usually the 10-year US treasury, which is incredibly low right now, thus
moving MSFT's cost of capital (the 0.1 in your denominator) lower. A quick
search tells me that their cost of capital is currently around 7%.

Also, you can't add assets in, since operating assets are required to generate
that FCF. You can add in cash, though, which is pretty substantial for MSFT.

~~~
samfisher83
If you are evaluating a project from the MSFT perspective you might want to
use their cost of capital, but as an investor if I can go get 10% why would I
want to use 7% as my rate?

In any case lets use your 7% you end up with 400bill which is still 50billion
less than what it is trading at.

~~~
smallnamespace
Where can you get a 10% annual return perpetuity?

Lending and borrowing rates are closely tied together since they're literally
just two sides of the same market. Global long term rates have been slowly
trending lower for the last few years.

~~~
samfisher83
[http://www.investopedia.com/ask/answers/042415/what-
average-...](http://www.investopedia.com/ask/answers/042415/what-average-
annual-return-sp-500.asp)

Over a long period of time that is what the market has returned. It is not
guaranteed.One year it might be down 50% one year it might be 50%, but if you
look at 30years S&P has returned about 7.5%. 10% is a just a round number
makes math easier. You can plug in a different number my point its hard to get
to 450 billion.

~~~
Retric
The S&P only had 500 companies starting in 1957 using that as the start date
you get: 6.170%.

S&P has returned ~6.5% over the long term in inflation adjusted returns.
However, the trend has been lower returns over time and inflation is currently
very low. [https://dqydj.com/sp-500-return-
calculator/](https://dqydj.com/sp-500-return-calculator/) (You can look at the
methodology, but they project further into the past.)

    
    
      6.736% : 1871 to now
      6.525% : 1900 to now
      6.281% : 1930 to now
      5.977% : 1960 to now
    

Further, there is a lot of volatility in these numbers consider:

    
    
      7.446% : 1990 to now
      2.352% : 2000 to now
    

PS Stable companies reasonably have a premium associated with that stability.

~~~
samfisher83
Ok I plugged in sept 1986 - sept 2016

Here are the numbers I got:

Annualized S&P 500 Return: 7.656%

Annualized S&P 500 Return (Dividends Reinvested): 10.047%

I didn't use CPI.

If you want to invest into MSFT at this price be my guest. I believe it is
overvalued at this level with such limited growth.

~~~
Retric
Which has nothing to do with long term price trends and everything to do with
artificially timing the market.

PS: If yesterday the market shot up 30% that's not a good sign for the next
month.

------
tonyedgecombe
Is it a real increase in revenue or just smoke and mirrors from shifting
Office revenue again?

~~~
drieddust
Only service I have really seen being used is O365 emails. Rest of the Azure
is not really being used by most of our customer. They are still dipping their
toes in water so yeah it look like smoke and mirrors. At least in my anecdotal
experience.

Edit: I don't have an issue with down votes but seems like some people are
angry. I just shared my experience.Can Microsoft show what is the revenue
growth in absolute terms.They are including Azure credits into the Enterprise
License Agreement and calling it cloud revenue. Availability of free credits
does not translate into adoption necessarily. Enterprise customers are still
evaluating the how costs will look like over a period of time.

~~~
akg_67
IMO, Enterprise adoption of Azure is growing specially enterprises that rely
on Microsoft stack exclusively.

In last quarter, I personally suggested to few friends at Microsoft stack
dependent companies to migrate to Azure instead of mucking around with colo
hardware, VMware, VM management, licensing etc. for external facing services.
It is a change for me. Previously I used to suggest moving to Linux/open
source stack to migrate to VPS providers or AWS.

~~~
Spooky23
That may be true, but for large companies they changed the business model
where large account resellers would bid under cost to sell EAs, etc.

They effectively raised the cost significantly for perpetual licensing/SA to
push you into services agreements. Simultaneously, you get favorable terms
(ie. anything other than MSRP) only if you commit long-term. Upon renewal they
try to make you give up your right to transition back to perpetual licensing
for Office.

So my bet is this is bullshit, shifting office dollars to O365, which include
plans where you're just renting Excel.

------
anon987
Friendly reminder: Less than a year ago Steve Balmer himself called
Microsoft's cloud numbers "bullshit"

[http://www.computerworld.com/article/3011662/cloud-
computing...](http://www.computerworld.com/article/3011662/cloud-
computing/microsoft-revenues-steve-ballmer-bullsshh-bullsshh-bullsshh-
bullsshh-itbwcw.html)

~~~
blahi
Another friendly reminder: Steve Ballmer is super mad at Gates and the board
for ousting him. He is especially mad at Gates all the way back from
succession. He obviously hates Nadella too. Jealousy is a bitch.

------
cerved
A lot of people seem confused at why an earnings boost in cloud revenues at
the expense of traditional licensing revenues would result in positive market
response. But you have to remember, there's a whole lot more to an earnings
report than the sum of all the numbers in the balance sheet. Even more
important is the story they tell.

In the last few years, IT has seen growth in new business lines such as SaaS,
cloud etc. and a growth stall n traditional revenue (HW, on-prem & licenses
etc.)

Older companies like Microsoft, IBM, Oracle have been making their bread and
butter for decades in traditional technologies whilst new upstart companies
like Salesforce, Amazon & Google have all established themselves as leaders
within newer fields.

In a sector where being an early winner within new technologies is key for
future revenue (like Microsoft & Windows in the 90's) the market is judging
these older giants not at the revenue they bring in, but in their ability to
retain market share and beat new players in the innovation game.

The boost in share price should be seen as a recovery from previous
depreciation of share price (Nokia & Windows phone anyone?) and a belief the
company has finally woken up to reality and is moving in the right direction.

------
thedangler
It's funny that I didn't take my own advice 4 years ago. A colleague asked me
what stocks she should buy and I said Microsoft. She bought in at around $20
something.

 __I don 't know how many she bought.

~~~
sakopov
I own MS shares and have been pleasantly surprised how stable MS stock is
compared to other tech stocks.

------
erikpukinskis
Just took a look at MSFT. I was surprised to see that the stock has been
climbing basically linearly for a solid 5 years now. I wanted to revisit the
CEO/stock price graph now that we've seen a bit of Nadella's performance:

[http://i.imgur.com/lr9j2KS.png](http://i.imgur.com/lr9j2KS.png)

I was expect to see a nice perfect correlation of Ballmer = flat stock price,
but it actually looks like the upturn began during his tenure. Speaks well for
him, although overall it's not a pretty picture of his tenure.

~~~
oldmanjay
In the nerd community in particular, there is so much wishful thinking that
Microsoft will fail that some people actually believe Microsoft is and has
been failing. It's fairly amusing given the reality.

------
grandalf
Microsoft has hired a large team of economists, econometricians, etc. to help
drive strategy in Cloud. Looks like it's paying off nicely.

Preston McAfee is a very clever guy and has seemingly been able to recruit top
tier econometricians out of academic positions:

[http://vita.mcafee.cc/](http://vita.mcafee.cc/)

------
Zigurd
I would expect this, and I would expect this trend to continue for several
years. Almost every Windows server running in a corporate machine room or
departmental closet should be an instance in the Azure Cloud.

Microsoft will be delivering extra value by providing the hardware and taking
responsibility for running these systems, and will generate recurring revenue
for as long as the customer needs what's on those servers. This is a gold mine
Microsoft can dig for many years.

------
sunstone
Would would ever have bet that Microsoft would kick Google's butt in the
cloud? Not me.

~~~
bitmapbrother
Given their low market share they're not kicking anyone's butt.

~~~
NetStrikeForce
[https://rcpmag.com/articles/2016/08/02/microsoft-behind-
aws-...](https://rcpmag.com/articles/2016/08/02/microsoft-behind-aws-in-
cloud.aspx?m=2)

Azure seems to have higher market share though? In HN I rarely see talk about
Azure and I see a lot of Google Cloud. Out there, where I consult with
enterprise customers among other things, I see a lot of Azure and almost no
Google.

It would seem that Google sells well among startups and in the Bay Area while
Microsoft sells a lot to enterprise.

~~~
bitmapbrother
The chart you linked to showed one thing very clearly - AWS is kicking
everyone's butt. In terms of YoY growth, Google was the biggest at 162%.
Microsoft and IBM should be very concerned about that considering all of the
new datacenters Google has coming online in 2017.

------
user5994461
Who used Azure here? What's your thoughts about it?

------
lokeshk
But, I thought pg said Microsoft was dead.

~~~
tim333
pg's position was

"No one is even afraid of Microsoft anymore. They still make a lot of money—so
does IBM, for that matter. But they're not dangerous."

Which I think remains largely true?

~~~
jerf
The only company that leaps to mind that acts like they are actively afraid of
Microsoft is Valve. It's the only explanation for keeping the SteamOS alive I
can think of (and developing it in the first place, for that matter), and the
way it has neither been shut down, nor really given the push it needs to
succeed. It's insurance, and as long as it's a half-viable insurance policy,
it's doing its job.

Everywhere else, either Microsoft is still the underdog against some very
strong incumbent or incumbents (Azure, mobile), or the competition is a
decade-old corpse (Office).

~~~
bitmapbrother
Valve isn't afraid of Microsoft, they're just critical of their motives. Steam
will always be the destination for digital PC games and there's nothing
Microsoft can ever do to change that. Everytime Microsoft has tried to
challenge Steam they've failed spectacularly. Microsoft and PC gaming just
don't go together.

------
meira
This is not a bubble. Let's not talk about a bubble.

------
JustSomeNobody
Let's all celebrate "The Cloud" as half[0] the East coast internet is blacked
out by a DDoS attack.

[0] I love exaggerating for drama.

