Post-PC Growing Pains

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Microsoft Stock Is Stuck Despite Windows 8, Surface

There has been a lot of negativity surrounding Microsoft (NASDAQ:MSFT) in a post-PC age. Though its Windows operating system still is entrenched and the company remains very profitable, it’s hard to argue that secular trends fueled by the mobile revolution and cloud computing aren’t working against Microsoft stock.

Microsoft made a big push in the last year to reinvent itself with an ambitious Windows 8 upgrade and its Surface tablet … but unfortunately these items seem to be feeding the uncertainty about Microsoft’s future, not reducing it.

There are a lot of reasons to like MSFT stock still, of course.

  • A plump 3.5% dividend yield
  • A war chest of about $66 billion in cash
  • A forward P/E of less than 9
  • A software stranglehold that will take ages to erode

But to me, these points can’t overcome the simple fact that revenue has stalled and that future growth will be incredibly difficult to come by as PC sales continue to decline and mobile efforts seem disappointing.

Here’s are the details:

Steven Sinofsky Overhang: I personally don’t think this high-profile departure will be a long-term drag on the company, but the ouster of Windows chief Sinofsky so soon after launch has caused many to wonder whether the Windows 8 project was seen as a failure before it even hit the market.

Core Windows 8 Sales Disappointment: That skepticism has seemed justified, too. Reviews of Windows 8 were hardly glowing. And a mid-November post on Paul Thurrott’s Supersite for Windows reported that Microsoft had not met its own internal projections for Windows 8 sales immediately after launch. The smokescreen is that PC makers haven’t stepped up to expected demand levels … but doesn’t that only further doubts about this revenue stream? That data has been supported by more recent figures released by NPD. Not good.

Windows Phone 8 Remains an Also-Ran: Reviews from early adopters of Windows Phone 8 for mobile handsets have been far from glowing, with tech forums blowing up with complaints. Some negativity is to be expected, but it wasn’t with functionality — it was in regard to random crashes and reboots. Also, Microsoft remains beholden on outside hardware makers that don’t seem super-excited to play ball. Smartphone leader Samsung has only one device shipping with Windows Phone OS on it right now, with expert Carolina Milanesi of Gartner saying to Ars Technica, “It’s going to be a little harder in the beginning [for Windows Phone to catch on with Samsung]. Right now it seems that their Windows Phone approach is very cautious.” That’s a painful Catch 22 — Samsung won’t offer the OS until it catches on, but it won’t catch on unless flashy phones start carrying it.

Surface Facing Headwinds: Microsoft Surface, the tablet with a keyboard, might have enterprise potential — especially for those used to Microsoft Office at … well, the office. But at a painful $899 to $999 for the high-octane Surface Pro? That seems awfully rich, and experts aren’t afraid to say so. Furthermore, as a replacement for the Apple (NASDAQ:AAPL) iPad and Amazon (NASDAQ:AMZN) Kindle, it misses the mark big-time. Reviews are lukewarm at best — and some lamentations of note label the device as “technological heartbreak,” “honestly perplexing” and “cutting a football field with toenail clippers.”

All or Nothing Is a Scary Thought: If Windows Phone 8 and Windows 8 are lackluster despite all the money and energy put into them … well, what the hell can Microsoft do? As Charlie Demerjian of the tech blog Semiaccurate writes, “The two mobile markets that Microsoft was locked out of have been attacked full on by Windows Phone 7.x and 8, Surface, WART, Windows 8, plus the might of the entire Microsoft ecosystem. This has been backed by hundreds of millions of dollars in advertising, more in OEM incentives, and sold through any dealer and retail network that is locked in to a monopolistic supplier. With all of this, filtering out the initial sales bump of a new product, Microsoft isn’t even holding its ground in phone and tablets. Failure is not nearly a strong enough term for Microsoft’s mobile ambitions.”

Admittedly, there is a smattering of good news out there for the mobile Microsoft efforts. The Windows Phone 8 handset launch has resulted in demand surging four-fold. And Windows 8 appears to be outselling Windows 7 after launch with some 40 million licenses sold in four weeks.

But the mobile challenges are many, and they are serious. If Microsoft can’t evolve, it runs the real risk of becoming one of those tech-sector also-rans that circles the drain for years looking to regain lost glory … companies like Hewlett-Packard (NYSE:HPQ) or Research In Motion (NASDAQ:RIMM).

It’s not out of the question that Microsoft can reinvent itself even if Windows 8, Windows Phone 8 and Surface disappoint. But with a decided lack of innovation in the company’s DNA, it seems like its all or nothing with this present mobile push.

Given the initial headlines, that’s a scary thought for MSFT shareholders.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing he held a long position in Apple but no other stocks named here.

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