Jensen Investment Management: Company Highlight Series – Microsoft Corporation (MSFT)
Last quarter, Microsoft was our leading contributor to fund performance. The stock was up 26%. During the quarter, Microsoft announced earnings which soundly beat top and bottom line street expectations despite a 5% currency headwind. Windows 10 adoption was strong during the quarter, as were the company’s enterprise and consumer cloud products, Azure and Office 365. Such sound fundamental performance in these products confirms our long-term investment thesis and we believe the market is recognizing this as well.
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Jensen Investment Management: Microsoft Corporation (MSFT) – The Conviction to Hold
The strength of Jensen’s investment philosophy is based on an unwavering commitment to invest in quality businesses for the long-term. We believe Microsoft is a great example of this. Despite a lackluster stock return for a number of years after our initial investment, we steadfastly believed Microsoft possessed many of the attributes we prize in a quality company. Those attributes include sustainable competitive advantages, strong financials, cash flow generation and solid growth prospects all at an attractive valuation. Our investment thesis was that Microsoft was primarily a mature, enterprise software company which also served consumers. No other enterprise software company did that. We saw its early entry in the enterprise and eventual consumer cloud markets and believed it was going to be an important driver for the business. Yet, in our opinion, investor sentiment was more focused on it being perceived as an out of touch consumer tech PC company that was grounded in the past. We believed this judgement weighed heavily on the stock price and believe the market undervalued the company. However, 3 years ago, sentiment started changing with the launch of Microsoft’s Azure infrastructure cloud service.
We believe sentiment meaningfully shifted further that year when long time CEO, Steve Ballmer, stepped down. After a lengthy search process, an insider, Satya Nadella, was named CEO. He has been at the helm for two years and has, in our opinion, honed the company’s vision, tightened its execution, and better articulated the value Microsoft delivers. We believe his message and actions resonate with the investing and media communities and our sense is there is a higher degree of optimism for the company. When Nadella was named CEO we initially believed he was a safe choice. However, he has exceeded our expectations and we believe he has fulfilled the role as a strong leader and visionary for Microsoft.
Microsoft Corporation – Advancing with Confidence
Over the past 3 years, Microsoft was the top contributor to the Jensen Quality Growth Fund’s performance. The company’s stock is up 31%, outperforming the S&P 500 by 16 percentage points and contributing 435 basis points to the Fund’s performance. Overall, the company lived up to our expectations and has become a formidable cloud competitor. As a result, the company is generating strong results as the demand for enterprise cloud services picks up. Microsoft was early to the cloud market in our opinion and we believe its enterprise cloud offering, Azure, is one of the most comprehensive infrastructure and platform cloud suites offered by any enterprise software company. Another area of strength is the cloud consumer software business which is primarily Microsoft’s cloud version of its dominant Office productivity software for the consumer. As of the most recent quarter, this product had over 18 million users and realized 20% sequential and 157% year over year user growth.
We believe Microsoft’s quality attributes are even stronger now, and it remains one of our top holdings in the Jensen Quality Growth Fund. We believe this example demonstrates our discipline and deep conviction for investing in quality companies for the long-term.