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Many investors feel Microsoft is fading, despite strong earnings. Apple, which recently passed Microsoft in profit for the first time since 1990 also recently passed Microsoft in terms of market cap. IBM -- another old rival -- is expected to soon do the same.   (Source: AP)

Investors fear that tablet and mobile devices will eventually minimalize PC sales, leading to Microsoft to go from a market leader to a bit player.  (Source: Level Ten Design)
You just can't please some people

Microsoft Corp.'s (MSFT) market cap -- a measure of the total current value of shares -- rests at $219.9B USD.  While that may sound great, competitor Apple, Inc.'s (AAPL) cap is nearly 46 percent higher at $320.5B USD.

In all practicality, both companies are firing on all cylinders.  But Microsoft is earning far less respect for its work.

Fueled by record sales of its Windows 7 operating system and Office software suite, Reuters I/B/E/S expects Microsoft to post a profit of $4.7B USD.  That's approximately 27 percent less than Apple's record earnings of $5.99B USD.  But as you can see, the gap in share value is much larger, percentage wise, than the gap in profit.

There's much debate currently over the investment community's low valuation of Microsoft.  Basically, it largely boils down to that investors perceive companies like Google and Apple to be growing, while they feel Microsoft is fading in the market.

Sales don't currently agree.

Microsoft is expected to earn a record $16.2B USD in its third fiscal quarter (the first calendar quarter of 2011).  And sales for its Entertainment and Devices Division (Windows Phone 7, Xbox 360, etc.) are also rapidly growing.

But at the end of the day investors appear convinced that Microsoft is in for a rough landing.  They eye the fact that the company has been passed by Apple in profit for the first time since 1990.  And they also are well aware that International Business Machines (IBM) -- another foe Microsoft passed in the 1990s -- may soon pass it in value as well.  It currently sits at a market cap of $206.3B USD.

Following the post recession recovery the entire tech market is booming, but the investors' strongest evidence in their case against Microsoft may be PC sales.  Over the first three months of 2011, PC sales fell 1 percent.  It is believed that is largely due to the sharp rise in tablet and smart phone sales.  People are still buying PCs -- but they're doing so less frequently as they increasingly rely on mobile devices.  And that's troubling news for Microsoft, who has struggled thus far in the mobile sector.

Michael Yoshikami, Chief Executive of fund manager YCMNET Advisors is among those very concerned with this development.  In an interview with Reuters, he states:

What people are going to be focused on is what's happening with their core PC business.  Is that slowing down? That's really going to dictate what Microsoft's future earnings power is going to look like.  In the long term, their core cash flow business is going to be impacted, particularly if we start to see an ASP (application service provider) model where companies are essentially renting software.

His comments allude to a second major crisis facing Microsoft -- advertising supported and rented software.  Both forms of software tend to produce lower revenues.  And most of Microsoft's profit is still driven by software sales -- particularly the sales of business licenses.  As business software giants like Inc. (CRM) and Google Inc. (GOOG) offer rented software, Microsoft finds its earnings under assault on a second front.

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Investors have a right to worry
By knitecrow on 4/27/2011 4:00:06 PM , Rating: -1
The entire M$ empire rests on windows OS.

- What happens when smartphones are powerful enough to replace desktops?
- What happens when the majority of "computers" sold doesn't carry windows?
- What happens if (when?) applications are all web apps?
- How do investors reconcile the fact that M$ has consistently show up late to most, if not all, the emerging trends?

RE: Investors have a right to worry
By kleinma on 4/27/2011 4:30:42 PM , Rating: 1
Every heard of Office? Microsoft makes a few bucks off that you know... I am pretty sure it is also the best selling application for Mac OSX.

Doesn't matter how powerful smartphones get. I will be able to type out my entire post while you are pecking away at your second sentence...

Microsoft started on the bottom in the PC world and won. Microsoft started on the bottom in the browser world, and won. Microsoft started on the bottom in the game console world and won. As companies like Apple and Google get bigger in marketshare, they are going to face the same issues that MS does. When you have hundreds of millions of customers, it is easy to piss some of them off. Apple controls too much, and google constantly puts out underdeveloped crapware that simply data mines your every move.

Now Microsoft has gotten somewhat complacent (as most do when they sit on top) and have started to feel the tree shaking from below, but that doesn't mean they will fall out. They do need to make some changes, but overall, they have a long ways to go before you can count them out. Even if MS went away as an operating system company, they could still do very well in other areas. Visual Studio is the most used software IDE in the world right now.

By Mitch101 on 4/27/2011 4:35:38 PM , Rating: 4
Other things Microsoft came in late to.

Desktop OS. I remember when it was IBM, Apple, Commodore, and Atari and Microsoft Windows didn't exist.

Servers - Novell was once king but now Microsoft is.

Web Browser - Netscape was king of the web but eventually Microsoft took a good foothold.

E-Mail - Lotus Notes was king but Exchange is now the king.

Gaming consoles - Late again but I bet Sony and Nintendo don't discount Microsoft.

Windows 8 runs on ARM.

I find it amazing when people think that their software cant ever be matched or beaten by Microsoft's software.

RE: Investors have a right to worry
By Nutzo on 4/27/2011 4:47:36 PM , Rating: 2
- What happens when smartphones are powerful enough to replace desktops?

You mean like 20-30 years from now when we have a voice or direct brain interface? Until then, not going to happen.

- What happens when the majority of "computers" sold doesn't carry windows?

What happens if Apple's market share starts to decline?
Just as/more likely as Window's share falling below 50%

- What happens if (when?) applications are all web apps?

Like the 99.9% of the almost worthless/simplistic apps for the iphone or android? And what happens when the web is down and you can't access your "cloud" and your apps?

"There's no chance that the iPhone is going to get any significant market share. No chance." -- Microsoft CEO Steve Ballmer

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