Satya Nadella Has Delivered a More Than 10X Return for Microsoft Shareholders Since Becoming CEO in 2014, a 30% Annualized Growth Rate. Is That Pace Still Achievable From Here?

Microsoft's (NASDAQ: MSFT) run under CEO Satya Nadella has been one of the great turnaround stories in the history of tech. While the technology company still had a great many strengths when Nadella took the reins from Steve Ballmer in 2014, the business was facing some significant challenges at the time of the leadership change. Microsoft had largely missed out on benefiting from the mobile revolution, Windows and Office were seemingly stagnating, and the company's growth bets weren't panning out.

Thankfully for Microsoft shareholders, Nadella's assumption of the CEO role marked a major turning point for the business. Since he took over as the company's top executive in February 2014, the company's stock has delivered a dividend-adjusted total return of roughly 1,570% -- working out to a compound annual growth rate of 29.7%. Is it possible the company could continue delivering that rate of return over the next 12 years?

Image source: Getty Images.

Microsoft is a great company, but investors should manage their expectations

Microsoft's successes during Nadella's tenure are undeniably impressive. Under his leadership, the company's business became heavily cloud-focused -- and the evolution of its Azure cloud infrastructure service helped transform the business and position it to capitalize on artificial intelligence (AI) trends. Growth for other subscription-based products also helped boost sales and earnings.

On the other hand, it's probably not reasonable to expect the stock to replicate that incredible run over the next 12 years. When Nadella took over, the company had a market capitalization of roughly $300 billion -- and its share price had been depressed by stagnant business performance, failed growth bets, and rising competitive pressures from rivals including Alphabet and Apple.

Today, Microsoft has a market cap of roughly $3.69 trillion and ranks as the world's fourth-largest company. While it's not impossible that the stock could continue to deliver nearly 30% average annual returns over a significant period of time, typically, the larger a company gets, the more difficult it becomes for it to deliver rapid growth.

Nadella took over at a time when Microsoft was struggling and its stock had fallen out of favor with investors. The turnaround that he helped to engineer and execute reinvigorated the business's growth engines, addressed competitive weaknesses, and positioned the company to drive and benefit from emerging tech trends. However, the incredible average annualized stock gains under his leadership are at least partially a result of the company having been in a relatively weak position when he became CEO.

Microsoft is looking much stronger today. Windows and Office continue to be solid performance drivers, the cloud business is growing at an impressive clip, and the company has a multitude of ways to profit from the AI trend. With those dynamics in mind, there's a good chance that the stock can continue to be a market-beating investment -- but expecting it to keep delivering annualized returns of nearly 30% in perpetuity isn't reasonable.

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, and Microsoft. The Motley Fool has a disclosure policy.