Most honeymoons don’t last an entire year. And most don’t leave their participants wealthier for the experience.
On that score, Satya Nadella should count himself lucky. It has been nearly a year since he was named chief executive of Microsoft , and its shares have rallied almost 30% in that time—or at least that was the case before Tuesday. The stock tumbled by 9% Tuesday afternoon, on pace for its worst single-day drop in 18 months, following Monday’s release of fiscal second-quarter results and the company’s accompanying outlook.
Even if this honeymoon was bound to end at some point, the comedown is harsh. The midpoint of Microsoft’s revenue outlook for the current fiscal quarter is nearly $3 billion short of Wall Street’s consensus forecast. Some of that relates to currency effects and struggles in China and Japan.
But some reflects the fact that Microsoft is transitioning a rather large business to a new model, and not getting any uplift from a stagnant personal computer market in the meantime.
So investors are left with a quandary: Is Microsoft an aging tech giant that is scrambling rather late in the game? Or is it a fast-growing cloud business that also generates sizable profits in a legacy business?
It is worth noting that the latter is a rarity in that particular sector.
Mr. Nadella has been leading Microsoft’s efforts to shift more business to the cloud, and Monday’s results contained some strong data points to this end. The company added more than two million net new subscribers to its Office 365 service during the December quarter. And its total commercial cloud business now generates about $5.5 billion of revenue at an annual rate, on par with Salesforce.com.
But that is barely 5% of Microsoft’s overall revenue. Meanwhile, the stock had been trading at 16 times forward earnings, nearly 40% above its five-year average. So investors are wise to hit the reset button now. The company is still early in its game.