Microsoft CEO Satya Nadella Sells $36 Million in Stock

Microsoft stock has been booming and with the lead figure behind the successful transformation cashing in on a significant part of his position raises more than some eyebrows.

Posted  767 Views updated 3 months ago

Summary:

  • Microsoft stock has been booming and with the lead figure behind the successful transformation cashing in on a significant part of his position raises more than some eyebrows.
  • Microsoft CEO Satya Nadella sold 1/3 of his shares with the stock being very close to its all-time high.
  • Can Microsoft's impressive rally continue or has Nadella triggered the end of that hausse?

 

It was big news this week that Microsoft CEO Satya Nadella sold around 1/3 of his shares with the stock being very close to its all-time high. (MSFT) Microsoft released a “Statement Of Change In Beneficial Ownership” on August 10, 2018.

Absolutely, he cashed in on 328,000 shares at $109.4396 each resulting in a total amount of $35.9M.Nadella transformed Microsoft from a sleepy and slowly giant to global technology leader in software and cloud.

This rejuvenation paid dividends throughout the company and the stock chart adequately reflects that.

If the father figure behind that successful change, now a large part of his holdings is "dump", it certainly is not what investors want to see. It also strengthens the notion that Microsoft can have the most effect, not just by a winker, as shown by two recent articles from the Falcon method "Microsoft and Do Not Look Back" and the very popular Chuck Carnevale himself "Long time Microsoft shareholders: your money may be in dangerous Situation".

Personally, I am not worried at all and do not think my money is in danger. There are three strong arguments here that despite the P / E ratio of earnings of about 28 times this stock has not been prepared to be sold now.

 

Here are three arguments in brief:

 

  • Nobody develops on a pony but on a broad basis.
  •  Do not be fooled by traditional assessment metrics
  • Perennial dividend growth is ahead

 

Let's go deeper with these arguments in brief:

Nobody develops on pony but on a broad basis:

Microsoft is an $ 835b stock gorilla and despite the impressive market cap, it was able to increase its top line of 17.5% reported recently. Microsoft's three main divisions - productivity and business processes, Intelligent Cloud and more personal computing (actually creative names) - all have posted a two-digit Y / Y growth rate, and all of them are about the same size as between $ 9.6 billion Are there in sales to $10.8 billion.

In terms of revenue generation and development, it may be the closest. The star cast, however, was definitely the Intelligent Cloud, which promoted sales of 23% under the leadership of 85% revenue growth from its product champion Azure. I have outlined four highlights from that report, which I will now briefly summarize:

  • Azure
  • LinkedIn
  • Microsoft 365
  • Gaming and Tablets

 

  1.  Azure: Azure's growth over the last years has been impressive and the most recent quarter was no exception here. With 85% growth recorded it does not need much more explanation you would think, but then again, it does as this represents the fifth consecutive quarter where Azure grew close to or above 90% Y/Y. We should also point out that Azure growth is slowing down, but this is happening at such a high level and with such a gradual pace that it is anything but alarming. The Microsoft Azure platform is growing thick and fast and Microsoft is investing very aggressively to build "Azure as the world's computer".
  2. LinkedIn: The world's largest networks/communities/member systems only behind Facebook, Instagram, and WhatsApp in the US. Microsoft's long-term goal is to make "LinkedIn the essential platform to connect the world's professionals and help them achieve more with experiences powered by LinkedIn and Microsoft graphs". If Microsoft can achieve this, and so far there is no real competitor insight in that domain with LinkedIn virtually being the Facebook for professionals, strong double-digit growth is poised to continue. It is still a long road to go before the acquisition amortizes for Microsoft, but it is certainly on the right track.
  3. Microsoft 365: 365 Office moved to the cloud, what started small is now a multi-billion-dollar business counting more than 135 million users. With data moving to the cloud, data security is a top priority and helps safeguard customers' businesses. It is a new way to work, fostering closer and faster collaboration, anywhere and any time access to vital data, and packaged in a way which feels comfortable to the generations of pre-cloud users.
  4. Gaming and Tablet: you don’t have to be an expert to recognize that the worlds gaming market has tremendous potential. According to a new zoo, the market will grow at an 11% clip all the way into 2021, with revenues eclipsing $180B. It won't take long until the addressable market will reach the $200B barrier. Out of the $122B estimated for 2017, Microsoft alone took a commanding share as it surpassed $10B for the very first time driven by Xbox software and service with revenue growth of 39%. There are a lot of big players in the gaming industry, most notably Electronic Arts (EA), Take-Two Interactive (TTWO) and Activision Blizzard (ATVI), and Microsoft is one of them.

 

Do not be fooled by traditional assessment metrics:

Chuck Carnevale did an excellent job when he carefully disbursed Microsoft's stock with an evaluation perspective in the earlier article. They concluded that Microsoft's surcharge is high and at one point an important argument was mentioned when Microsoft traded on an $ 808 billion market cap.

Essentially, compared to its historical general P / E ratio of approximately 17 times earnings since 2002, the current P / E ratio of 27.2 represents a significant overgrowth. It also appears in the yield of only 1.6%, which represents the stock below 10 years. Concurrently, this means that in the case of bad news or general market improvement, the stock could fall to 35-40% according to Chuck.

This is a perfectly logical line of argumentation and I fully agree with the findings but partly disagree with the approach and strongly disagree with the conclusion that it is time to sell the stock as Nadella did.

In fact, there are four more arguments why traditional valuations metrics do not tell the story when buying and selling Microsoft Stocks:

  1. Generally, it is impossible to guess if the stock is correct or not. Even if prices have become irrational, then it can continue for so long that indispensable reforms can only take you to today's prices. Also, when you should not love any particular stock, you can certainly fall in love with a company. And Microsoft is a big company that helps change the world's data by providing solutions to effectively, efficiently and sustainable stores, stocks, processes, and data.
  2. Don't invest by waiting for the 10%-20% drop which may never come unless the overall market corrects considerably. Such an event could happen any day but even trade wars and the demise of the Turkish Lira have not really impacted Microsoft's stock price and frankly speaking, why should it? Microsoft's exposure is super limited right now and as long as the cloud is not subject to "import tariffs" it requires a lot of creative thinking to come up with meaningful arguments as to why Microsoft should drop. The arguments that the correction is around the corner is raised every quarter and so far it has been wrong every time with the stock following its path to $1T.
  3. However, even in the rather unlikely case of a sudden 10% drop (stock price would be at around $98), it could very well be the case that this dip gets bought very quickly by investors as many may have been waiting for that drop to finally occur. Within days we could be back at where we are now. In fact, it appears more likely to me that we won't get Microsoft at a significant discount before the next recession hits us and by that time the stock could have already gained another 20%+.
  4. A Such quantitative analysis is great, sound and comprehensible and while it may have statistical relevance as it covers lots of years, it can easily miss capturing the evolving business model of a company which may justify much higher multiples. Based on the old Microsoft growing earnings in the single digits and acting more like a slow and sleepy giant the current valuation would be sky-high. The new Microsoft though under Nadella is a complete difference. The cloud is booming and Microsoft is innovating. Back then they were cashing in on their Windows and Office de-facto monopolies which were both crappy, error-prone and crashed so often. Nowadays, Office and Windows are still important but other areas like Azure, subscription offerings, and gaming are booming. Such a successful transformation showed itself in double-digit revenue and EPS growth rates and with many levers, in place today's multiple may be off charts in historical terms but in value, territory based on business fundamentals and outlook.

Perennial dividend growth is ahead:

Microsoft is one of the most solid dividend stocks in the technology sector with a 1.6% yield and is currently paying a dividend of $ 1.68 per share. In September 2017, that dividend was finally increased to 7.6% and since the year 2004, continued dividend history of the company continued annual dividend growth.

 

Present yield is the best and lower than the 10-year low level, but Microsoft is getting its 40% payout ratio in its business, its triple-A rating and the huge amount of liquidity still has a lot of dividend growth, Microsoft investors Forward ahead. Of course, I want to invest on 2%, 2.5% or even 3% yield, but when you can take Microsoft off the exemption, then the time mentioned above has definitely ended.

 

Within 10 years we will double our net yoke and total stock price. This is a hypothetical example in which 8% dividend growth is quite conservative and 10% annual stock price appreciation shows a little demonstration for 8% long-term S & P 500 trend because I believe that Microsoft is a better stock than the market.

Investor Take-Away:

So Satya Nadella sold a large part of his Microsoft portfolio, but unlike his excellent track record of executing Microsoft's strategy and vision, I think investors should not follow the suit and appreciate visiting here.

The reasons for that sale are unknown and anything can be done with "enough to buy a house of 3 bedrooms in Palo Alto" for the initial/special access to critical and value-added information for portfolio diversification. At this point we do not know and when that sale can be disappointing, surely there is no time to panic and sell your stock and it is never seen behind for three reasons:

  1. Microsoft is not a trick pony but is looking at a strong broad base everywhere
  2. This assessment can raise some eyebrows based on historical comparisons but do not be fooled by it
  3. This is a good stock for long-term dividend investors, however, due to its low initial yield, shouting is not a purchase, but with the perennial dividend growth of years and decades, even the least plants can grow in a big tree.


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