The boomers and Xers remember when Microsoft was so dominant that a federal judge ordered it broken up.
That year of peak Microsoft was 2000, the tail end of the dot-com boom. While the company stayed in one piece and moved on, 10 years later its stock price was nowhere near its peak. It became easy to never think of Microsoft except maybe when upgrading to the new Office software suite.
But, of course, peak Microsoft really came last week.
It’s also the era of peak Apple, peak Amazon.com and peak Netflix.
These companies are worth so much in the stock market now that their big year has become one explanation for a booming stock market rally since March, when a sharp downturn due to the coronavirus pandemic reversed course.
This might not be a stock market story, either, explained away by factors like bored sports bettors looking for a new way to squander their money. Maybe instead we are seeing more value in companies that provide the stuff that turned out to be essential as the COVID-19 pandemic rolls on, and maybe even well after it winds down.
Microsoft often seems surprising on a list of high-flyers, because it must be well into its sleepy, late middle age by now, right? It has been a quarter-century since release of its groundbreaking Windows 95 operating system for personal computers.
After months of ignoring news of its resurgence, it took less than an hour of reading to see it’s a genuine powerhouse. It provides an array of software and services that form part of the basic foundation for business, stepping into the kind of role once played by International Business Machines Corp.
Microsoft reported revenue of about $35 billion in its last quarter, up 15% from the prior year’s quarter, with an operating margin of better than 37%. It generated cash flow from operations in just those three months of $17.5 billion.
Microsoft has been battling for top spot among America’s most valuable companies with Amazon and Apple. Yet because of the structure of its ownership, Microsoft is the biggest factor now in how well the S&P 500 performs and thus our perception of the “stock market.”
The S&P 500 is a weighted index, so the relative value of the components matters a lot. The heavyweight champ Microsoft outweighs the top 10 Minnesota-based companies, combined as a group, by more than two to one.
Take a Minnesota blue-chipper like Target, a corporate stalwart that’s a big part of the state’s economy. Microsoft has more than 25 times the impact of Target in the S&P 500. Microsoft shares go up in price 5%, and that could be enough to make it a good day in the stock market. Target stock goes up 5% and the needle may not budge.
Valuable, not overvalued
This isn’t just a Microsoft story, either. Microsoft stock’s strong appreciation this year has trailed Netflix and Amazon. As of last week, just six big technology companies now make up about a quarter of the S&P 500.
These big technology companies are still not wildly overvalued, at least according to strategist Jim Paulsen from the Minneapolis-based Leuthold Group, nothing like technology firms were during the frenzied speculation that powered Microsoft (and even a few comically speculative startups) to new highs 20 years ago.
Moreover, he explained, the professional investors are buying them now because they appear safer to own in a really stressful time, kind of like how fund managers bought the stock of utilities or food companies in an earlier era. As he put it, “The rally in tech and new-era is being driven at least in part by bearishness and fear.”
What made those old-fashioned “defensive” companies attractive in a sinking economy is that their businesses held up better because nobody voluntarily cut off their own electric power or quit buying groceries. These things are indispensable.
And that’s the word that Gene Munster, analyst and co-founder of venture firm Loup Ventures in Minneapolis, used to describe the “tools and products” that companies like Microsoft and Apple now sell.
You may not love these companies, their market dominance and hubris, but they do really deliver. Social isolation and working from home made Apple’s iPhones and iPads as important as a working refrigerator. Need a computer mouse right away because a teenager borrowed one that then went missing? Try Amazon.com.
There are competitors in streaming video including Apple and Walt Disney Co., but Netflix is the can’t-miss place for entertainment this year.
Last weekend our family used Netflix to watch a new movie about a comically bad Icelandic musical duo. The movie was fine, but what made this a memorable evening was how five family members could watch one movie together, chatting away, from four different living rooms.
I don’t know how much Netflix would have to raise its price to get me to cancel.
Facebook has been another strong performer of late, yet Munster called it “an outlier” to his notion of the top firms providing essential services.
He’s not referring to the swelling controversy over Facebook’s content algorithms and hate speech. He just can’t easily see what its next big opportunity is.
These big technology companies have likely become too important for regulators to ignore, and unwelcome changes for them may lie ahead. But to Munster the winners both provide something essential now and will probably keep doing that as needs rapidly evolve.
“How people work five years from now is going to look very similar to the way we worked during the pandemic,” Munster said, and employers likely will want all the necessary tools in one package to enable that to work. Microsoft, he said, “is in a position to do that.”
Even now, counting up the services or products from Microsoft I use took more than the fingers of one hand. There’s writing with Microsoft Word on a Microsoft keyboard, retrieving documents stored in the cloud on OneDrive and connecting with colleagues through the video conferencing and messaging service called Teams.
When Monday morning comes and the mouse is clicked to get into OneDrive, it really needs to work.
And it will.