Why Ray Dalio’s Bridgewater Associates bought Microsoft stake
Bridgewater Associates and Microsoft
Microsoft Corp. (MSFT) is a 0.12% position in Bridgewater’s portfolio, initiated in 4Q 2013.
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On February 4, Microsoft announced the appointment of Satya Nadella as chief executive officer, months after Steve Ballmer stepped down. Nadella was earlier the executive vice president of Microsoft’s Cloud and Enterprise group. Although analysts considered the appointment to be a “safe choice” and the stock price rose slightly, Nadella heads Microsoft’s fastest-growing, most profitable divisions. He has spearheaded major strategy and technological shifts, especially Microsoft’s move to the cloud and the development of cloud infrastructure supporting Bing, Xbox, Office, and other services. In the last fiscal year, the division generated $20.3 billion in revenue and $8.2 billion in operating income.
The company is also in the process of transforming itself from a software player to a “devices and services company” in an organizational overhaul aimed at improving sales and its competitive position. The $7.2 billion acquisition of Nokia’s devices and services business last year was in line with this transformational move. Nadella is poised to face several challenges, as the company’s core consumer business is lagging behind the enterprise. Declining PC sales, a shift to mobile computing, and high competition in the tablet, gaming, and online advertising space have been impacting the consumer segment. Microsoft was a late entrant in the mobile space and has been struggling against market leaders Google (GOOG) and Apple (AAPL) and even Amazon (AMZN) in the tablet space.
In 2Q 2014, revenue increased 14%, to $24.52 billion, while net income increased 2.8%, to $6.56 billion—above street estimates. The devices and consumer segment grew 13%, to $11.91 billion, boosted by Surface tablet revenue, which more than doubled sequentially, and Bing search advertising revenue, which increased 34%. The Windows operating system saw revenue decline 3%. Xbox 360 platform revenue decreased $1.1 billion, or 29%, due mainly to lower volumes of consoles sold and lower video game revenue, offset in part by higher Xbox LIVE revenue. The company’s commercial revenue grew 10%, to $12.67 billion, driven mainly by revenue from commercial cloud services. Microsoft representatives said, “Our commercial cloud services revenue grew more than 100% year-over-year, as customers are embracing Office 365, Azure, and Dynamics CRM Online, and making long-term commitments to the Microsoft platform.”
Shareholders have been demanding radical changes at the company and only time will tell if Nadella can rise up to the challenges. On Nadella’s appointment, FBR analyst Daniel Ives said, “We believe filling this position with a core Microsoft insider will disappoint those hoping for a fresh strategic approach (e.g. potential breakup of enterprise/consumer, Xbox spin off) an outside executive could have brought to the table.” Microsoft has heard calls to spin off its money-losing businesses (especially Bing and Xbox) and concentrate on selling enterprise solutions.