Microsoft’s Outstanding 2019 Performance, The Nadella Factor

Microsoft continues to impress investors after stock prices climbed 55 percent in 2019 – the company’s best performance in a decade. Since becoming CEO six years ago, Satya Nadella has successfully led the software giant through leadership changes, corporate reorgs, and strategy realignments. Building on this new foundation, the company wrapped a stellar year, which included landing the Defense Department's $10 billion JEDI contract, several acquisitions that bolster its offerings, and significant customer adoption of Azure technology.

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Strong earnings growth and an increase in its price-to-earnings (P/E) ratio are the primary drivers behind Microsoft's stellar stock performance – the best since its 56 percent gain in 2009. Adjusted (non-GAAP) earnings show a 22 percent surge in fiscal 2019, which finished in June and another 21 percent year-over-year upwards trend reported for Q1 fiscal 2020.

At the start of the year, MSFT was trading at a P/E ratio ranging in the low 20s but closed at 29.7 times earnings by the end of December 2019. The added valuation bumped up the stock's performance and helped make it a significant factor in S&P's rise last year – contributing 7 percent to the index’s 2019 increase.

With large enterprise organizations like Novartis and Humana choosing Azure AI for their data collection and healthcare solutions, the future looks bright for Microsoft heading into 2020. Expected to reach $166.6 billion by 2024, the global cloud infrastructure market is growing fast, and Microsoft is well-positioned to command a sizable share. Combine that with the credibility the JEDI contract gives Microsoft for handling higher-security projects, and it opens up new windows of opportunity for Nadella's tech giant.

Microsoft made over 20 acquisitions last year, including several Internet-of-Things and artificial intelligence-related businesses and a few that augmented Azure’s offerings. jClarity, a performance-tuning tool for Java applications, was one such purchase the company made back in August 2019 to enhance its services. Beyond its M&As, Microsoft has also partnered with the likes of OpenAI to build new supercomputer capabilities for Azure AI. Between these two strategies and its own in-house efforts, MS can continue to expand and innovate into the future.

As of its third quarter, Microsoft was the largest holding of investment bank William Blair’s Large Cap Growth Fund – representing 9 percent of the portfolio. The fund’s manager, Jim Golan, stated they bought into Microsoft after Nadella took the helm based on the company’s potential within the cloud and artificial intelligence spheres.

“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.”