Microsoft wraps up its best year since 2009

Key Points
  • Satya Nadella has now been Microsoft's CEO for almost six years.
  • This year the company won a major government contract and saw companies adopting its latest technology.
Satya Nadella, chief executive officer of Microsoft Corp., speaks during a keynote session at the Microsoft Developers Build Conference in San Francisco, California, U.S., on Wednesday, April 29, 2015.
David Paul Morris | Getty Images | Bloomberg

Microsoft just finished its best year in a decade — at least when it comes to stock price performance.

Shares ended trading at $157.70 on Tuesday, extending its gains for 2019 to 55.3%, making this the stock's best year since 2009, when it rose 56.8%. Microsoft shares were up 417% higher for the decade — not quite the 9,562% gain of the 1990s, which saw the launch of Windows 95, but easily overshadowing the 2000s, when the company emerged from its major antitrust case.

The Dow Jones Industrial Average, Nasdaq Composite and S&P 500 also jumped in the 2010s amid the longest economic expansion in U.S. history. The Nasdaq outperformed the other two indices with 295% growth. Microsoft didn't grow as much as some other S&P 500 constituents like Amazon, Broadcom and Netflix. Then again, Microsoft is worth more than all three of those companies, with a $1.20 trillion market capitalization. Only Apple and Saudi Aramco are worth more.

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This year Microsoft was a major contributor to the S&P 500's rise, second only to Apple. It contributed about 7% of the index's gains in 2019.

The stock outcome reflects Microsoft's evolution. In the past 10 years the company underwent leadership changes and strategy shifts and pulled off its biggest acquisition yet. This year Microsoft has built on those transitions, and investors are expecting more growth as companies upgrade to the company's newest technology.

And while regulators have looked afresh at Alphabet, Amazon, Apple and Facebook in recent months, Microsoft has largely escaped their scrutiny this time around.

Here are some of the highlights of 2019 that could set up Microsoft for future gains in the months and years ahead:

  • Windows 7 end of support. Microsoft will stop releasing security patches for Windows 7, which was released in 2009, on January 14, 2020. This event has been leading companies to shell out money so that employees can be on the latest platform, Windows 10. In the first quarter of Microsoft's 2020 fiscal year, Windows OEM Pro revenue grew 19%, the fastest growth since 2014. Windows OEM Pro reflects sales of Windows licenses for commercial PCs, and it represents 46% of Microsoft's total Windows revenue, Bernstein Research analysts Mark Moerdler and Firoz Valliji estimated a note distributed to clients in November. The analysts have the equivalent of a buy rating on Microsoft stock.
  • Server product updates. The SQL Server 2008 database software reached end of support in July, and the Windows Server 2008 and Windows Server 2008 R2 operating systems will hit that point on January 14, 2020. Organizations have started moving to newer products, and that has helped boost Microsoft's Server products and cloud services revenue. The category grew by 30% in the first quarter of Microsoft's 2020 fiscal year, and that's saying something, because it's the biggest major product or service in terms of revenue. Server products and cloud services also includes the Azure public cloud.
  • Government business. Perhaps the best news for Microsoft this year was scoring the Joint Enterprise Defense Infrastructure, or JEDI, contract to supply Azure cloud services to the Defense Department, a deal that could be worth up to $10 billion. Amazon Web Services, the top cloud infrastructure provider and the vendor that some people expected to win the contract, is protesting the award, but for now Microsoft is the recipient of one of the most prominent government information-technology contracts in recent memory. Should Microsoft hold onto it, a cloud-snowball effect could take hold, and the win could attract additional business.
  • Console wars, round four. Gaming might not be the first thing you think of when you think of Microsoft, but it gives the company 9% of its revenue. The company isn't about to abandon the market. Even as it's been readying a game streaming service, Microsoft is planning the launch of its fourth-generation console, the black refrigerator-shaped Xbox Series X, in the 2020 holiday season. In the 2010s Xbox One consoles never managed to exceed 32% of total console shipments and were always outsold by Sony's PlayStation 4, according to figures compiled by Lewis Ward, a research director at industry analysis firm IDC. Now the company is hungry. "We like leading in power and performance, and I feel like we're going to be there again," Microsoft's executive vice president of gaming, Phil Spencer, recently told GameSpot.
Microsoft's next-generation Xbox Series X console.

Microsoft was the largest holding in investment bank William Blair's Large Cap Growth Fund at the end of the third quarter, at over 9%. The 20-year-old fund bought Microsoft stock after Nadella took over based on the company's potential in areas like cloud and artificial intelligence, Jim Golan, a portfolio manager of the fund, told CNBC in an interview in November.

"We've been very pleased with that investment," Golan said. "I think just [Nadella] changing the mindset and refocusing the company on key core growth areas has been really instrumental in terms of driving the performance that we've seen over the past several years."

The adoption of cloud services will be a major driver for Microsoft in the future, and the company should be able to expand its margins as Azure gains scale, he said.

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