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Windows Phone is Dead: What's Next for Nadella's Microsoft?

Zacks Equity Research

In a few days, Satya Nadella will complete two years of heading Microsoft Corp. MSFT.

And if someone were to ask me which CEO I think has actually changed the way a company functions, I would name him.

Let’s see why.

Remember when Microsoft (under Steve Ballmer) believed, “If you want to use Microsoft you have to buy everything from us.”

That’s not true anymore, thanks to Nadella.

He changed the company’s attention from using only its own hardware platforms to getting everyone to use its cloud-based software platform.

That is, you no longer need a Windows phone to use Microsoft’s services. You can use the services from an Apple AAPL iOS or Google's GOOGL android device. The cloud is no longer restricted by hardware or operating system choices.

Why It Matters

In the recent quarter, Microsoft managed to only sell 4.5 million Lumia devices — a massive 57% drop year over year. As per IDC, in the recent quarter, 400 million mobile phones were sold — and only 1.1% of those were Lumia Windows phone.

In fact, Microsoft and Nokia have sold only 110 million Windows phones compared with 4.5 billion iOS and Android phones in the same period.

To make matters worse, Microsoft doesn’t really have any convincing Lumia handsets. Both Lumia 950 and Lumia 950 XL were below par flagship devices with incomplete Windows 10 mobile software.

Lack of hardware, combined with lack of sales and hardly any market share — it’s safe to say that it is the end of Window’s phone.

What Next?

If rumors are to be believed, Microsoft is set to launch a Surface Phone. However, we believe that it should create a market for it first. Sales of Windows phones have been on a constant decline and it’s no secret that the app situation is only getting worse.  

Going forward, it is possible that real Windows on phones with Continuum might survive, but Windows Phone, as we know it, is over.

However, in our opinion, Nadella has made sure that Microsoft moves on even if the Windows phone is dead.

Nadella’s decision to focus on cloud regardless of the device the consumer uses has given Microsoft a long-term strategy that takes reality into account.

Microsoft incurs loss for every Lumia device sold, but it makes up for it from cloud users. Thus, the company has raised the average revenue per Windows 10 user significantly compared with the income from Windows 7 and Windows 8 users. Minimizing losses, pursuing ongoing revenue from users and maintaining a presence on mobile will ensure the future of the company.

Microsoft currently carries a Zacks Rank #3 (Hold).

Investors may consider stock of Mercadolibre, Inc. MELI as it sports a Zacks Rank #1 (Strong Buy).

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