Microsoft (MSFT)
Microsoft (MSFT: Charts, News, Offers), the tech juggernaut that owned the past two decades of personal computing, faces an uncertain future with naysayers left and right claiming that it has been starved out by the siege placed upon it by Apple (AAPL: Charts, News, Offers) and Google (GOOG: Charts, News, Offers). Pundits claim that Microsoft has become IBM (IBM: Charts, News, Offers) in the twilight years of its growth, a lumbering company too diversified for its own good and falling behind the tech curve that it had commanded for years. Cloud computing, search and mobile web – many view these as the soft vulnerable underbelly of the company. Can Microsoft make a comeback in these areas, or is it doomed to forever trail Apple and Google with Ballmer’s “late to the game” tactics?
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Stock Analysis
Microsoft is one of the world’s most well known companies, with its Windows operating systems, XBOX video game systems, and Office consumer and enterprise software, being mainstays of the modern electronics consumer. It has consistently high net margins around 30%, and currently trades with a forward P/E of 9.04 and a PEG ratio of 0.97. It also has a quarterly dividend yield of 0.13, which has consistently increased in the past seven years. So why is the stock of the one of the largest and most well-known companies in the world trading so low? Let’s examine four sources of pain for the aging tech giant – cloud software, search, social and mobile devices.
Without a doubt, Google was the first company to bring cloud computing into the mainstream. Before Google’s now omnipresent Google suite of tools – Docs, Maps, Books and more – “cloud computing” seemed to be simply a Silicon Valley buzz word. Microsoft knew during the late 1990s that the “cloud” as we know it today – documents and programs on the Internet that can be freely accessed from any web capable device – would be the ultimate destiny of the Web. That’s why Bill Gates tried so hard to integrate Internet Explorer directly into Windows in an attempt to create the first cloud based OS, a monopolistic move that brought upon it the wrath of Netscape and the U.S. Department of Justice. Today, Google has a painfully obvious head start in cloud computing, as evidenced by Microsoft’s own paltry offerings – Microsoft’s only true cloud based services are the 2 gig online storage service SkyDrive, which cannot be truly integrated into Windows 7 without the use of a 3rd party application, and Office, which offers lite, browser-based versions of its Office Suite. The cloud-based Office, in particular, is a cannibalizing threat to Microsoft’s own Office line, regarded as one of its primary cash cows. To make matters worse, Google’s Chrome OS, intended to tie all its cloud components together, is slated to be released in the coming year and already has the hardware support of longtime Microsoft allies such as HP (
HPQ:
Charts,
News,
Offers) and Dell (
DELL:
Charts,
News,
Offers).
On the Internet search and advertising front, Google is still king, and has beaten down Microsoft’s Bing and Yahoo in most markets. In the U.S. Google commands nearly 70% of the market. Microsoft, which once offered to buy Yahoo to much hype, has now settled for
a 10 year search partnership with the latter in order to survive a Google-controlled market, a lopsided deal that rewards Yahoo with 78% of the revenue generated from Microsoft sites. However, Google dealt a particularly painful blow in late July when Yahoo Japan, which is 35% owned by Yahoo, decided to
drop Yahoo’s Bing-powered search engine in favor of Google, giving Google an 80% market share in the country. Just last week,
AOL renewed its search deal with Google for another five years, reinforcing the company’s search monopoly and reminding Microsoft how insignificant Bing was. Microsoft has been so desperate to stunt Google’s growth that it prompted an
EU antitrust lawsuit against Google through its invested companies – Ciao and Foundem, although Microsoft denies instigating the claims directly. Clearly Microsoft needs to find a way to consolidate Google’s competitors under one flag or be destined to lose the search and ad market.
In the realm of social networking, Microsoft has a 1.6% share in Facebook, which comes with a deal that the latter must inform the former if Google ever came knocking with a buyout offer. This clause alone shows just how much Ballmer and company fear Google. The Facebook investment has allowed for some obvious integration – the
Windows Live homepage can be set to directly read the Facebook News Feed, and albums from Live Spaces can be shared with Facebook, though rather clumsily and in separate site-specific albums. This integration is really nothing that Google devices, both web-based
(iGoogle) or mobile-based (Facebook for Android) have not accomplished already. In addition, its Live Spaces site, which consists of an integrated Messenger, Blog, E-Mail and News Services, is woefully incomplete; with all these resources, many are left wondering why Microsoft can’t tie them altogether to make one incredible new all-in-one site. Rumors have been circulating for over a year that the company may try to buy Twitter, but even if that happens, does Ballmer have the know-how to make social integration work? Social networks have now become a mainstay in the rising popularity of smartphones, and unfortunately Google’s Android and Apple’s iPhone have thus far dominated this market.
Microsoft’s Windows Mobile, never a market leader for smartphones, has fallen even farther back in the pack with the entrance of Apple and Google. Currently, Google Android, boosted by its wide variety of handsets and carriers, at 34%, Research in Motion’s (RIMM: Charts, News, Offers) Blackberry is second at 29%, Apple comes in third with 21% and Microsoft comes in second to last with 9%. The only system Microsoft beat this last quarter was Palm’s WebOS, an offering from a failed company which has already been purchased by HP. Windows Mobile 7, developed under contract by HP (HPQ: Charts, News, Offers), has been hyped to the public but has received a lukewarm response from hardware companies. HP has already announced that it would not attend Ballmer’s launch event; LG, Samsung and HTC, which initially promised Windows Mobile 7 handsets, have all been releasing Android handsets in the meantime, and it’s become less and less likely that they will release Windows Mobile 7 devices. Even stalwart partner Dell has been mum on its plans for using Microsoft’s new mobile OS. What does this all mean for Microsoft? More of the same – uncertainty, lack in direction and a muddled attempt to catch up to Google and Apple.
Investors wonder if the age of Microsoft is over. While the stock will never go to zero, the days where Microsoft was revered have long past. If Steve Ballmer can finally swallow his pride and get the company back on track with its deep pockets, then perhaps it has hope as a new chapter in tech unfolds – one dominated by the cloud.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the
Stock of the Day analysis.
You were doing so well with the preamble…
Then you lost all credibility with:
“Microsoft knew during the late 1990s that the “cloud” as we know it today – documents and programs on the Internet that can be freely accessed from any web capable device – would be the ultimate destiny of the Web. That’s why Bill Gates tried so hard to integrate Internet Explorer directly into Windows in an attempt to create the first cloud based OS….”
Unless this is an alternate reality, Bill Gates was the one who did not even think the INTERNET was more than a fad. And you’re crediting him as having envisioned a CLOUD-BASED OS? Wow. That is more than Mr. Fantastic can even stretch in the lame action movies.
Imran
Thanks for the critique, although I would have to disagree. While the buzzword wasn’t “cloud” at the time, Bill Gates’ attempt at integrating IE directly into the OS, then linking the entire system with a html-like hyperlinked “Active Desktop” starting with IE 4.0 was clearly designed to create exactly what Google is doing now, an Internet-based OS.
Your “fad” quote regarding Bill Gates in 1993: “The Internet? We are not interested in it” (in an immediate business sense) was before the GUI World Wide Web of the later 14.4 k modem years, and certainly before IE 1.0 was even released in 1995.
Please take a look at this link: http://www.computerworlduk.com.....ill-gates/
to see that Bill Gates certainly did not think the Internet was a passing fad. Thanks for reading.