By Jay Greene and Anne Steele 

Shares of Microsoft Corp. jumped to an all-time high Friday in the wake of a positive earnings report, nearly 17 years after setting its previous high-water mark in the heyday of the dot-com boom.

The stock traded as high as $60.45 on Friday morning, eclipsing its previous midday trading high of $59.97. It recently traded at $59.99, up 4.8%.

In December of 1999, Microsoft shares closed at their highest level, $59.56, adjusted for a 2003 stock split. Back then, the stock soared on the software giant's dominance of the PC operating system market and productivity applications. The company was riding the wave of internet use, which boosted demand for its software.

But as the dot-com bubble burst, Microsoft shares slid and then stagnated for nearly 13 years as the company wrestled with antitrust regulators and lagged behind rivals such as Apple Inc. and Alphabet Inc. on emerging tech trends such as mobile computing and web search.

Investors often blamed then-Chief Executive Steve Ballmer for the company's challenges. The stock started to rally in the summer of 2013, about the time that Mr. Ballmer announced he would leave Microsoft.

His successor, Satya Nadella , has unwound some of Mr. Ballmer's failed efforts, notably writing off most of the $9.4 billion acquisition of Nokia Corp.'s handset business. Instead, Mr. Nadella has focused the company's efforts on cloud computing, tapping longstanding relationships with corporate customers to convince them to use Microsoft's web-based, on-demand Azure services.

"This move has been in the works for a while, but clearly under the leadership of Satya there's been more focus. It feels like there's been a faster embrace of change -- and a cultural change at the company," said Pacific Crest Securities analyst Brent Bracelin, pointing to last month's announcement that Microsoft would reorganize efforts around artificial intelligence.

"There's already a focus on the next thing beyond cloud," he said.

While Amazon.com Inc. dominates the market, Microsoft has emerged as the online retailer's stiffest competition. For the past year, revenue from Azure has doubled compared with the year-earlier period each quarter.

Perhaps more important is the meaningful improvement in cloud margins. While gross margins overall are depressed because Microsoft has been spending to build up its data infrastructure to support the cloud business, commercial cloud margin shot up to 49% in the latest quarter from 42% in the previous quarter.

"The increase in profitability of this business is what's really exciting for investors," said Nomura analyst Frederick Grieb.

Mr. Nadella, on the company's earnings conference call Thursday, highlighted the progress of Microsoft's cloud business.

"Once enterprise customers choose one of our cloud services, they continue to adopt more services," he said. He noted that Microsoft's cloud business has annualized revenue of more than $13 billion and that the company remains on track to expand that to $20 billion in fiscal 2018.

And investors are cheering the change. Two years ago, whether Microsoft would be able to make the transition to cloud was a "big question," said Mr. Bracelin.

"These big large-cap companies -- their valuations are dictated by how well they're doing in transitioning to cloud computing where the stakes are large," he said. "Microsoft is doing an excellent job pivoting, and that has implications long-term."

Microsoft shares began their latest rally three months ago, after the company posted better-than-expected fiscal fourth quarter results on the strength of its cloud business. The stock popped again in after-hours trading Thursday after first quarter results showed Microsoft continuing to successfully transition its business to the cloud.

The rally around Microsoft's successful shift to cloud computing comes with an important backdrop, Mr. Grieb points out: The slide in personal computer sales is moderating. Personal computer shipments fell again in the second quarter, but the declines were less severe than in other recent periods.

Write to Jay Greene at Jay.Greene@wsj.com and Anne Steele at Anne.Steele@wsj.com

 

(END) Dow Jones Newswires

October 21, 2016 12:16 ET (16:16 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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