Satya Nadella’s first decade as Microsoft CEO was defined by cloud. What’s next?
Microsoft CEO Satya Nadella speaks during a keynote address announcing ChatGPT integration for Bing at Microsoft in Redmond, Washington, Feb. 7, 2023.
Jason Redmond | AFP | Getty Images
When Satya Nadella replaced Steve Ballmer as Microsoft CEO in February 2014, the software company was mired in mediocrity. Its market cap was just over $300 billion.
A decade later, Microsoft’s valuation has swelled tenfold, to $3.06 trillion, making it the world’s most valuable public company, ahead of Apple. It’s firmly entrenched as a leader in key areas, such as cloud and artificial intelligence.
As Nadella marks his 10-year anniversary at the helm, he’s widely praised across the tech industry for changing the narrative at Microsoft, whose stock fell 30% during Ballmer’s 14 years at the top. In that era, the company was squelched by Google in web search and mobile and was completely left behind in social media.
Many tech industry analysts and investors would say that, thanks largely to Nadella, Microsoft is now set up to be a powerhouse for the foreseeable future.
Nadella “is special and someone to be considered as one of the GOATs among tech CEOs,” said Aravind Srinivas, co-founder and CEO of AI startup Perplexity, which has the backing of Amazon founder Jeff Bezos. The acronym GOAT stands for greatest of all time.
There are plenty of obstacles in Nadella’s way as he pursues further growth.
Regulators are concerned about Microsoft’s power. Rivals are jealous. Some clients are skeptical about spending even more money on the company’s AI tools when they already allocate so much budget to so many Microsoft products. And Microsoft, along with its tech peers, has dealt with mass layoffs of late, cutting 10,000 jobs in early 2023, and eliminating 1,900 in January from its gaming division.
One of Microsoft’s biggest sore spots when Nadella took over was the closed nature of its products. Microsoft was known to defend its proprietary Windows and Office software and denounce open-source alternatives. Interoperability wasn’t the most popular word.
“There was a little bit of a take-it-or-leave-it culture,” said Aaron Levie, co-founder and CEO of cloud storage vendor Box, which spent its early years going directly after one of Microsoft’s products. Nadella has made the company more attentive to customers’ needs, Levie said. The two companies now have multiple product integrations.
Larry Ellison, co-founder and executive chairman of Oracle Corp., speaks during the Oracle OpenWorld conference in San Francisco on Oct. 22, 2018.
David Paul Morris | Bloomberg | Getty Images
Nadella’s Microsoft has also formed partnerships with some of its fiercest rivals. In 2023 Oracle co-founder Larry Ellison visited Microsoft’s headquarters in Redmond, Washington, for the first time, as the companies made a joint cloud announcement. In a 2020 interview, Pat Gelsinger, then CEO of VMware, said offering his company’s software on Microsoft’s Azure cloud was akin to a “Middle East peace treaty.” Gelsinger now runs Intel, which makes chips for PCs running Microsoft Windows and clouds such as Azure.
In the Nadella age, Microsoft has also contributed to open-source projects, released software under open-source licenses and released a version of its Teams communications app for Linux.
Nadella has surprised people in other ways.
Michael Nathan was a senior director at Microsoft until 2016, when he left for a job in venture capital. Nathan said he told Nadella about the opportunity after the two of them left a customer meeting in Silicon Valley. Instead of getting angry or making the situation awkward, Nadella told him to take what he’d learned at Microsoft and share it.
“I was like, ‘What?'” Nathan said. “That was amazing. He totally lifted the burden of having that conversation.”
He’s also decisive. In 2018, Nadella came to believe in the idea of buying GitHub just 20 minutes after Nat Friedman, then a Microsoft corporate vice president, started pitching him on it. Right away, Nadella suggested that Friedman become GitHub’s new CEO, Friedman said. Microsoft paid $7.5 billion for the code-storage startup.
Microsoft declined to provide a comment for this story.
Nobody would mistake Nadella for Ballmer, the showman. His predecessor was known for dancing on stage at conferences and hyping up crowds of thousands. Ballmer is now the owner of the NBA’s Los Angeles Clippers and can frequently be seen behaving similarly courtside.
Steve Ballmer, former chief executive officer of Microsoft Corp., gestures as he speaks during a news conference after he was introduced as the new owner of the Los Angeles Clippers in Los Angeles, California.
Kevork Djansezian | Bloomberg | Getty Images
While Nadella may not bring as much entertainment value, he’s proven to be more effective than Ballmer when it comes to dealmaking. In addition to GitHub, Nadella has made pricey acquisitions such as LinkedIn, Minecraft parent Mojang, and Nuance Communications that have contributed to Microsoft’s top line. Ballmer was not so lucky. His aQuantive and Nokia deals were disastrous.
More recently, Nadella helped Microsoft land the $75 billion acquisition of game publisher Activision Blizzard, a deal that investors won’t know how to assess for a while. And in AI, Nadella is credited for investing billions of dollars in startup OpenAI, leading to product enhancements and cloud revenue from customers both new and old, and giving Microsoft a leadership position in an emerging market.
Nadella is perhaps best known in the tech industry for pushing Microsoft deeper into cloud computing. Azure, which delivered 30% revenue growth in the most recent quarter, was started during the Ballmer years. But Nadella brought it to life, transforming it from a research project into a product, said Kevin Dallas, CEO of database software company EDB and a 24-year Microsoft veteran.
“I’m shameless in saying I look at him as a leader that I’ve learned from, grown from,” Dallas said. “I continue to watch him.”
In looking at the road ahead for the 56-year-old Nadella, here are some of the biggest challenges in his way:
Relevance
Microsoft looked at buying TikTok in the U.S. in 2020, but nothing came of those discussions. While some in the younger generations have Microsoft software at work, it’s not necessarily what they grew up using and may not be what they prefer. The company must prepare for the era when Gen Z is in charge of IT budgets. OpenAI’s ChatGPT, which some students use, could be a start.
Retention
Some Microsoft employees have been there for over 20 years. Many will leave after far less time. For years, employees have said they can make more money at other big tech companies. Some have received higher compensation after leaving and then returning. Microsoft has $81 billion in cash and might want to use more of the stash to keep talent — especially the top tier — around for longer.
Products
Microsoft critics often say the company rarely gets it right the first time with new hardware or software and that it’s best to wait for the third version. Reviewers didn’t take kindly to the original 2012 Surface tablet, for example. Today’s Surface gets better marks, but it’s nowhere near the most popular tablet on Amazon — the iPad is. Microsoft remains weak when it comes to building products in new categories, a former executive said. The company’s dual-screened Surface Duo phones running Android haven’t caught on, and Microsoft Loop, a response to modern productivity apps such as Notion, has yet to catch fire in app stores.
Regulation
Antitrust officials have recently blocked acquisitions at Adobe and Amazon. They tried and failed to squash Microsoft’s purchase of Activision. But Microsoft’s big push in AI has come through an investment, not a purchase. The Federal Trade Commission’s Lina Khan said in January that the agency will examine cloud providers’ investments in AI startups. Microsoft has also drawn inquiries in Europe over its cloud practices. Regulatory crackdowns are nothing new at Microsoft, which infamously changed some of its behavior following a high-profile case brought by the U.S. Justice Department in the 1990s.
OpenAI relationship
In regulatory filings, Microsoft calls OpenAI “our strategic partner.” The unusual nature of the arrangement was on display in November, as Nadella worked overtime to get Sam Altman back on top at the startup after the board fired Altman suddenly. Microsoft and OpenAI compete to sell AI services to companies and have a relationship that can cause internal tension. In allocating graphics processing units to OpenAI, for example, Microsoft is sometimes depriving its other departments of them, two people familiar with the matter told CNBC. Altman told Nadella onstage at an event in November that the two companies have “the best partnership in tech.” However, OpenAI isn’t always satisfied relying on Microsoft as its cloud supplier, one of the people said.
Following the November brouhaha, Nadella was at least able to get Microsoft a seat on OpenAI’s board. An OpenAI spokesperson told CNBC that the company views Microsoft as a very good partner.
Next big thing
Nadella is constantly searching for the next category that can generate revenue and profit. The company’s HoloLens augmented reality headset, announced in 2016, hasn’t become a big hit. Nadella hoped that an AI Copilot added to the Bing search engine in February 2023 would convert into share gains, but Google remains the clear leader in that category. Nadella did say on a conference call this week that Bing gained share in the fourth quarter. While AI might be Microsoft’s next big thing, the company will have to continue to find new ways to drive growth.
Nadella has plenty to keep himself busy for now. Analysts on average see enough expansion to project a 12% gain in the stock price over the next year, according to FactSet.
WATCH: Microsoft is ‘so far’ ahead of competition and taking market share, says Jefferies’ Thill
A view of Google Headquarters in Mountain View, California, United States on March 23, 2024.
Tayfun Coskun | Anadolu | Getty Images
Advertising is so back.
After a brutal 2022, when brands reeled in spending to cope with inflation, and a 2023 defined by layoffs and cost cuts, the top digital advertising companies have started growing again at a healthy clip.
Meta, Snap and Google all reported first-quarter results this week, with revenue growth that exceeded analysts estimates and at rates not seen in at least two years. Their financials were primarily driven by improvements across their ad businesses.
The companies entered earnings season in a favorable position in that their numbers would be comparable to historically weak periods. But investors and analysts were cautious in their expectations, given the political and economic instability in various markets across the globe and the ongoing challenges posed by high consumer prices.
Meta, which was the first in the group to report results, put some fears to rest on Wednesday, showing a 27% jump in first-quarter revenue to $36.5 billion. For the Facebook parent, it was the strongest rate of expansion since 2021.
“When Meta was in its dark days two years ago, the company knew what they had to do to get back on track,” analysts at Bernstein wrote in a note after the earnings report. “To their credit, Meta defended the core.”
That dark era was defined by the combination of macroeconomic challenges and Apple’s iOS privacy change, which made it harder for social media companies to target users with ads. Meta lost two-thirds of its value in 2022 and was forced to dramatically cut headcount.
A smartphone is displaying Facebook with the Meta icon visible in the background.
Jonathan Raa | Nurphoto | Getty Images
Meta responded by rebuilding its ad system, with the help of hefty investments in artificial intelligence, so it could deliver value to brands despite the roadblock imposed by Apple. The stock almost tripled in 2023.
While the company’s first-quarter results beat estimates across the board, the shares tanked on Thursday after CEO Mark Zuckerberg focused his post-earnings commentary on the many ways Meta is spending money in areas outside of advertising, notably the metaverse.
“We’ve historically seen a lot of volatility in our stock during this phase of our product playbook where we’re investing in scaling a new product but aren’t yet monetizing it,” Zuckerberg said on the earnings call late Wednesday.
The Bernstein analysts, who recommend buying the shares, said Meta’s ad revenues were led by strength in online commerce, gaming, entertainment and media, and that China-based ad demand “remained strong.” Meta has benefited from a surge in spending from Chinese discount retailers like Temu and Shein.
“Without sounding overly religious, you either believe in Zuck or you don’t, and we do,” the analysts wrote.
‘Incrementally positive’
Alphabet followed on Thursday, reporting ad revenue for the first quarter of $61.66 billion, up 13% from the year prior, with YouTube ad revenue jumping 21% to $8.09 billion. The company as a whole grew 15%, a rate last seen in 2022, and the stock shot up 10% on Friday, the sharpest rally since 2015.
During the quarterly call with investors, Alphabet finance chief Ruth Porat said the company is “very pleased” with the momentum of its ad businesses.
Analysts at Citi wrote in a note on Friday that the broader advertising environment is “clearly strengthening,” pointing to accelerating growth within Google Search and YouTube.
“We emerge from Q1 results incrementally positive on shares of Alphabet,” the analysts wrote, maintaining their buy recommendation.
Snap shares rocketed 28% on Friday after the company reported a 21% increase in revenue to $1.19 billion, the strongest growth in two years. In each of Snap’s past six quarters, sales either grew in single digits or declined.
The company said it’s seeing accelerating demand for its ad platform and benefiting from an improved operating environment, according to its investor letter.
Deutsche Bank analysts wrote in a report on Friday that Snap delivered a “much-needed” beat, and that its ad stack is back on track. The analysts, who have a buy rating on the stock, said investors appear “most encouraged by the ad platform investments, which are showing increasing promise.”
Despite the rally, Snap shares are still down 14% for the year.
Investors will get a clearer picture of the digital ad market next week, with Pinterest reporting on Tuesday alongside Amazon, which has emerged as a giant in online ads. Reddit will follow on May 7, reporting earnings for the first time since the social media company’s initial public offering in March.
Technology
Snap shares rocket 28% after company reports unexpected profit, better-than-expected revenue
A view of the atmosphere during the Snap Partner Summit 2023 at Barker Hangar on April 19, 2023 in Santa Monica, California.
Joe Scarnici | Getty Images Entertainment | Getty Images
Snap shares surged 28% on Friday after the company surprised Wall Street by showing a profit and reported sales and user numbers that exceeded analysts’ estimates.
The stock climbed $3.15 to close at $14.55, its biggest percentage gain since 2022. Even after the rally, the stock is down 14% for the year due to a 31% plunge in February.
Revenue in the first quarter increased 21% to $1.19 billion from $989 million a year earlier, topping analysts’ estimates for sales of $1.12 billion, according to LSEG.
The company reported adjusted earnings per share of 3 cents, while analysts were expecting a 5-cent loss. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $46 million, compared to analysts’ expectations for a loss of $68 million.
Snap said adjusted EBITDA “exceeded our expectations” and was primarily driven by operating expense discipline, as well as accelerating revenue growth.
Snap has been working to rebuild its advertising business after the digital ad market stumbled in 2022. Its investments are starting to pay off. The company said in its investor letter that revenue growth was primarily driven by improvements in the advertising platform, as well as demand for its direct-response advertising solutions.
“I think more broadly, we saw a much more robust brand environment, which played out in all of our regions in Q1,” CFO Derek Andersen said on the earnings call.
User growth was also better than expected. Snap reported 422 million daily active users (DAUs) in the first quarter, up 10% year over year and topping the average analyst estimate of 420 million, according to StreetAccount.
In February, Snap announced it would lay off 10% of its global workforce, or around 500 employees. The company said Thursday that headcount and personnel costs will “grow modestly” through the rest of the year.
Advertising revenue came in at $1.11 billion in the first quarter. Snap’s “Other Revenue” category, which is primarily driven by Snapchat+ subscribers, reached $87 million, an increase of 194% year over year. Snap reported more than 9 million Snapchat+ subscribers for the period.
Though Snap’s growth was its fastest since March 2022, it still fell behind that of Meta, which reported 27% growth in its better-than-expected first-quarter results on Wednesday. Meta shares plunged anyway after the company issued a light forecast and spooked investors with talk of its long-term investments.
For the second quarter, Snap expects to report revenue between $1.23 billion and $1.26 billion, up from the $1.22 billion expected by analysts, according to StreetAccount.
WATCH: Watch CNBC’s full interview with Snap CEO Evan Spiegel
Technology
Federal regulator finds Tesla Autopilot has ‘critical safety gap’ linked to hundreds of collisions
-
Sports2 years ago‘Storybook stuff’: Inside the night Bryce Harper sent the Phillies to the World Series
-
Sports1 year agoMLB Rank 2023: Ranking baseball’s top 100 players
-
Environment11 months agoJapan and South Korea have a lot at stake in a free and open South China Sea
-
Sports3 years ago
Team Europe easily wins 4th straight Laver Cup
-
Sports6 months agoGame 1 of WS least-watched in recorded history
-
Environment1 year agoGame-changing Lectric XPedition launched as affordable electric cargo bike
-
Technology3 years ago
Game consoles were once banned in China. Now Chinese developers want a slice of the $49 billion pie
-
Politics2 years ago
Have the last few wobbly weeks seen a turning point for Johnson as PM?