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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Comments
  • Sudheer

    You forgot one main thing: the dirty Microsoft has unethically killed its competitors for years, such as Lotus, Netscape, Borland, and now Nokia.

    A large number of people hate Microsoft because of its very, very dirty tactics. The people working in it also have become dirty fellows, obviously due to company’s DNA.

    Whole world knows how Microsoft is looting Nokia by sending virus Elop into Nokia. How can MS force Nokia to kill its well selling OS and go with only one OS which is unproven ? Can Microsoft go with only one hardware partner to sell its OS ?

    With nearly 2 years of partnership, Nokia has lost more than $30 billion in market cap and made billions of loss, just to get some mere $1B WP OS support ?

    Tell me one thing: Whether Microsoft goes with only one hardware partner to sell its software products ? No, never.

    Similarly, Nokia being a hardware company, it must offer all popular OS on its hardware, just like how all other OEMs are doing ?

    Everybody is looking for a chance to avoid Microsoft and post-PC era is the time. Microsoft will go to hell soon because of its very dirty business, anti-competitive tactics.

    How people look at Apple and Google ? Do people give same respect to Microsoft ? Never.

  • Sudheer

    Tell me one thing.

    Whether Microsoft depend on only one hardware manufacture for its OS products ?

    No, never. Why, any software company needs to have as many h/w partners as possible. With only one h/w partner, it can sell little and continue to exist.

    Similarly, it is foolish thing that Nokia, being purely a hardware company now, use only one OS in their phones. Even that OS is unproven, ugly and keep on rejected by people. Then, how can it succeed ? It can sell some WP phones but that is not going to change anything in the world, neither for Nokia fans/investors.

    The whole world knows how dirty Microsoft injected its virus Elop into Nokia and killed off Nokia’s best OSes (Symbian and MeeGO), and forced it to use only their OS which has hardly 3% market share.

    No hardware company in the world can survive with only one software partner. It needs to offer as many OSes as possible to crab marketshare, just like how every other guy doing except Nokia.

  • Sudheer

    Windows Mobile 1, 2, 3, 4, 5, 6, 6.5, 7, 7.5, 7.8 and now 8. All junk and hence FAILED. The total market share is less than 4% and too after looting Nokia to boost WP like giving away Lumia for free.

    Windows 8 is very urgly to use. People will surely like to GIFT it to somebody whom they hate !

    • roh

      Need to learn to use it.

  • Sudheer

    Nokia has been being looted by dirty Microsoft and dirty Elop just to increase WP market share which has been less than 4% for past few years due to its ugly interface, features and applications.

    Microsoft forced Nokia to kill its Symbian and Meego and go only with Windows Phone OS. How can a hardware company go with only one OS ? A hardware company needs to offer its phones in all available and popular OS, just like how a software company offers its OS to as many hardware manufacturers as possible. How this simple thing is not going into Finnish people and govt and how they are believing Elop that a single OS can save Nokia ? I simply don’t understand this. They must be knowing but pretending as if they dont know anything and letting Nokia looted by dirty Microsoft.

    Can Microsoft dare to sell its WP OS only through one hardware manufacturer, whether it is Nokia or Samsung or somebody else ? Surely not. Then, why should Nokia stick itself to only one OS that too very unproven, rejected by people by so many times. What is the fun here, Finnish Govt ? Act at-least now before it is too late, and make Nokia produce phones with all popular OS. Under Elop (and Microsoft), Nokia made more than $5 billion in loss and much more in market capitalization. Fire Elop and extract all this loss from him and from Microsoft.

    Finnish Govt, you should teach a lesson to those dirty Elop and Microsoft so that other people learn and don’t attempt to do so in future !!!

  • Sudheer

    Do you know that dirty Microsoft is producing their mobile OS since 2002 without success!

    All their mobile OS will be like Beta and incomplete.

    Just to make their programming easy, they can’t make user-experience horrible ! Man, grow up. User experience is first priority. Windows Phone 7/7.5/7.8/8 all have ugly user experience as sales show.

    Microsoft is able to sell some WP phones just because of Nokia’s dirty Stephen Elop who is looting Nokia just to boost WP market share. Neverthless, Nokia will be no more in an year…!

    • roh

      If you do not like it, don’t use it. Use something else comparable to Windows of any version. No one forcing to use it

  • Sudheer

    Yes, Windows Phone 8 is obviously a junk as it borrowed ugly tiles from failed Windows Phone 7.

    Since 2002, Microsoft is in wrong direction and making things / user-experiences worse version by version.

    Funnily, Microsoft took 10 years to add multi-tasking and finger touch support to their phones! They have been trying and failing since 2002 in mobile space.

    The fate of Windows 8 is also same. Nobody is going and buying Windows 8 except in organizations which were forced to buy Win 8 instead of Win 7.

    The fate of Surface tablet is also same. Since it is neither a device nor a laptop, initial interests are gone and nobody is talking about it now.

    Very funny Microsoft !!!

  • lloyd olson

    I have windows 8 and 7, who is the idiot that says there is something wrong with windows 8 ? 40 million in 4 weeks?? and someone say’s this is bad ??
    Do I like windows 8,? yes, and use both, 8 is coming on my new lap top as well.

    • http://slant.investorplace.com/ The Slant

      40 million is correct, but it’s all about expectations not the headline number. Read more here…

      http://www.geekosystem.com/microsoft-disappointed-by-windows-8-sales/

      Remember that Apple sold 5 million iPhone 5s in the first weekend but that was also “disappointing.”

    • garry

      That’s 40 million licences sold to hardware manufacturers to install Windows 8 on their devices. It does not mean 40 million devices have actually been sold to end user customers

  • kellen miller

    Msft is a brilliant company they are on track and can and will get market share up to what their stock holders need before buying more. 4 percent is good since they have not had the luxury of giving a away their OS or to have the first real good smart phone. What I don’t get is that the turncoats that beg for more from Msft. They comply, and then that is not enough. When you ask for something and get it, you should comply with buying not crying for what the others have. I mean give me break. Windows 8 is actually pretty good.