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Shares of Microsoft (NASDAQ: MSFT) have more than tripled over the past five years, stunning many investors who believed that the tech giant's heyday had long passed. Much of Microsoft's growth spurt can be attributed to Satya Nadella, who succeeded Steve Ballmer as the company's CEO in 2014.
But can Microsoft keep growing over the next 10 years? Let's take a look back at the company's previous turnaround and where it could be headed.
Microsoft CEO Satya Nadella. Image source: Microsoft.
How did Nadella fix Microsoft?
When Nadella took the helm, he launched a "mobile first, cloud first" strategy to reduce Microsoft's dependence on sales of Windows and Office licenses through expansion of its mobile apps and cloud services. Nadella also aimed to change Microsoft's smartphone strategy, which had mainly consisted of launching Windows Phones (supported by its acquisition of Nokia's smartphone unit).
To make that happen, Microsoft offered free Windows 10 upgrades to consumers, discontinued the Windows Phone business, focused on launching Microsoft apps for iOS and Android instead of building its own hardware and OS, and ushered legacy Office users toward Office 365 subscriptions. It also expanded its lineup of Surface devices.
Last year Nadella stated that the company had reached "a billion" Windows users worldwide. Microsoft also tethered Xbox One consoles to the Windows ecosystem with universal apps and let gamers stream Xbox games to Windows PCs. The HoloLens "mixed reality" headset, which it launched for developers in 2016, further expanded the Windows ecosystem into the augmented and virtual reality markets.
Microsoft's HoloLens. Image source: Microsoft.
Microsoft also invested heavily in the expansion of Azure, which is now the second-largest cloud infrastructure platform in the world after Amazon's (NASDAQ: AMZN) AWS (Amazon Web Services). In 2015, Nadella declared that Microsoft would generate $20 billion in annual cloud revenues by mid-2018, but it surpassed that target in late 2017. All those moves initially weighed down Microsoft's earnings, but strengthened its revenue growth and brightened the company's long-term outlook.
Where will Microsoft head over the next decade?
Over the next 10 years, Microsoft's commercial cloud revenues -- which mostly come from Office 365, Azure, and Dynamics CRM -- should keep growing and pivot its business away from sales of individual software licenses. The overall SaaS (software as a service) market, which includes Office 365 and Dynamics, could grow from $72.2 billion this year to $113.1 billion by 2021, according to Gartner. During the same period, the combined IaaS/PaaS [infrastructure and platform as a service] markets -- which Azure and AWS currently lead -- could grow from $46.2 billion to $90.7 billion.