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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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By Mitch101 on 4/27/2011 4:25:02 PM , Rating: 1
Microsoft doesn't make cars we can say that Microsoft is being killed by Toyota. In order for Android and iOS to clean Microsoft clock then Microsoft would have had to have a market dominance in the Mobile OS area.

Apple has 3 real cash cows and those are being cut off by Google. Is Apple safe from Android?

1. Microsoft never had market dominance in the mobile sector to lose market share! These are new OS markets and an opportunity to sell copies of a mobile OS. Android and iOS are winning but Microsoft is coming. If anyone is losing here it is RIM.

2. Windows 7 has sold more copies than there are people in the United States. Nothing is challenging Microsoft on the desktop and laptop market. Before someone says Apple they might claim 10% but its nowhere near that. Apple is maybe 4% marketshare I judge this on the websites I manage and how little the safari browser is used.

3. Corporate again there is nothing cutting into Microsoft dominance here. Your Windows and/or Linux servers and your more than likely Windows on the desktop.

By michael2k on 4/27/2011 6:32:02 PM , Rating: 1
If cars were going to replace PCs, then yes we would say Microsoft is being killed by Toyota.

In order for Android and iOS to clean Microsoft's clock, then Microsoft would need to be displaced by iOS and Android. That remains to be seen.

Microsoft has three real cash cows and those are being cut off by Google and Apple. Is Microsoft safe from Android and iOS?

1. Microsoft's dominance in PCs means any tablet or smartphone bought that delays or retards a PC purchase is a lost opportunity to sell an OS license. Android and iOS are winning, and Microsoft has yet to reestablish any kind of foothold. RIM still has a significant market share compared to Microsoft.

2. Microsoft has only sold 350 million W7 licenses in the last 18 months. RIM sold 45m smartphones in 2010. Apple sold 46.6m, and in total 296m smartphones were sold. Of that lot? Microsoft was only 12m. If you include the 172m units shipped in 2009, more smartphones were sold than W7 licenses.

3. Corporate? Blackberry and iOS are making corporate inroads with iPads, Blackberries, and iPhones. You seem to think PCs are unassailable. Tell that to IBM who banked on mainframes 30 years ago. Most businesses need less, not more, flexibility. A locked down iPad with bluetooth keyboard and strictly controlled access to network resources and apps will function just as well as a locked down PC with keyboard. Heck, if you could get apps on an AppleTV, a locked down AppleTV with DVI output for $99 would work too.

By someguy123 on 4/27/2011 9:48:49 PM , Rating: 2
I don't really understand how you can perceived your post as positive spin. You're pointing out that w7 alone has more license sales than all smartphone sales combined, and that microsoft managed to push through 25%~ of what their competitors did (though I believe the numbers you're posting are from all devices RIM and iOS and not just limited to smartphones) in the smartphone category(45 vs 12). You also don't give any evidence of lost windows sales due to smartphone adoption. On the contrary, it would seem like the current smartphone/tablet industry has done nothing to windows as windows 7 maintains substantial sales and has managed to surpass windows XP.

The argument that corporate is interested in replacing desktops (currently) with blackberry/ios components is absurd. I've had my corporate blackberry for years and I've yet to be summoned to a meeting discussing desktop shift to blackberry, mainly because it does absolutely nothing but communicate. This is the same with ipads, especially since it's a closed device and we would need to jailbreak them to be able to run anything of use other than browsing the internet and taking facebook photos.

By michael2k on 4/28/2011 1:35:27 AM , Rating: 2
Actually, if you read my post, W7 alone has less license sales than all smartphone sales combined, and that MS alone has pushed less than 5% of smartphones in a year.

There's no evidence of lost Windows sales due to smartphone adoption, I even said that, but I do believe in a year or two that is a very real threat. The proof is in the announcement that Microsoft will support ARM in Windows 8.

Don't forget that W7 netted 350m in 18 months, while my numbers were for 1 and 2 years respectively. 1 year is lower than 350m, 2 years is much higher, and for the 18 month period it would be reasonable to say that sales were comparable.

You're being shortsighted if you don't think Windows 8 on ARM wouldn't be an extremely cost effective business oriented thin client. The risk is that someone else (RIM, Google, Apple, or HP) gets there first. My bet is HP.

By mcnabney on 4/28/2011 10:26:55 AM , Rating: 2
I think businesses like the idea of cutting out the heavier hardware cost for PC terminals (moving to an AppleTV-type box for stationary, iPad-like for mobile employees), cutting out the Microsoft licensing costs, and having a more efficient platform to build on. Remember, Android is just Linux. Development and security isn't going to be a stretch. Managing and maintaining these devices will also be a lot cheaper and easier.

By maven81 on 4/28/2011 10:47:11 AM , Rating: 3
Where are you getting the idea that it's going to be cheaper? Laptops are cheaper then tablets. Most of the desktops businesses buy also tend to be low end rather then high end workstations. Also if they use windows they likely have a site license, and receive support from microsoft. Who's going to support the tablet OS? Google?! The tablet manufacturer? How about onsite service? How about qualifying hardware and software to run on your tablet or porting your legacy software to the tablet? Not to mention that you can forget about upgrades or part swaps. Your tablet breaks you pretty much have to send the thing back to the manufacturer for repair.
You're describing a total nightmare for an IT department.

By Reclaimer77 on 4/28/2011 11:57:48 AM , Rating: 2
I completely agree. I seriously don't know where people get these ideas.

Tablets run "apps". Where are you going to get serious productivity software and support? I mean, that's a joke!

By michael2k on 4/29/2011 2:31:33 PM , Rating: 2
Windows 8 ARM solves all those problems.

The problem is if the HW costs $99, Microsoft is unlikely to be able to net $50 licenses.

By Calin on 4/29/2011 8:44:08 AM , Rating: 2
Windows 7 is new, so people that bought them now won't buy them next year. Compare that to the people that buy a new mobile phone.
I don't know what the future holds for Microsoft in mobile devices, but based on the current position, Microsoft isn't seen as able to take a major part of that market.
Considering that Microsoft had WindowsCE and Windows Mobile phones in the market before Apple and Google took it by storm, and that Microsoft was almost the only player in tablets (well, Microsoft's tablets were mostly convertible laptops with touch screens), analysts are seeing its current position as "Microsoft lost".

By wordsworm on 4/27/2011 9:26:18 PM , Rating: 1
You are missing the bigger picture here. People who love their iPhone or gPhone will get used to the OS that they're using on those mobile devices. Same goes for the iPad and the gPad. But, since the pad devices are larger, it is more significant. People will get used to how gOS and iOS work, and that will turn into a preference for the big screen. Linux has already wiped the floor with Microsoft, server side. Microsoft is in a weaker position than it has been since Apple sacked Jobs and before the second coming of Jobs.

I realize that W3Schools' users are not a reflection of the entire net. But it gives a taste.

W3Schools pegged the competition at 4% with MS at 93.2% in 2003. Their latest numbers are 13.1% vs 86%.

Browser wise, Microsoft had 85.8% in early 2003 with competition at 10.7%. Today, Explorer 25.8% vs 73.7%.

In other words, Microsoft's dominance is ebbing away at an increasing rate. I wouldn't want to invest in their company.

By Gungel on 4/28/2011 8:17:37 AM , Rating: 2
The IE dominance was cracked by a law suit that MS lost and it had to remove IE as an integrated part of Windows. However, this restriction is expiring next month and as Windows 8 shows, IE will again be a integral part of its new OS and is required to access the cloud and take full advantage of all the online features Windows 8 offers.

By mellomonk on 4/28/2011 2:42:04 PM , Rating: 2
IE is still an integrated part of windows. Ever run Windows update? The only place where it was ever removed was in the EU, where current versions have the 'browser choice' as part of installation.

IE dominance was primarily cracked by the rise of Firefox. The various forms of IE are still the dominate browser followed by Firefox, Chrome, and Safari.

A good deal of cloud access will not be through browsers in the conventional sense. Netflix streaming devices, Dropbox-like applications, and possible store'n-stream music services from Amazon, Apple and Google will all come on line. Mobile internet access in general is growing in leaps and bounds. Cisco expects mobile traffic to be 75 times larger in 2012 then 2002. In some parts of the world mobile is the way most people access the internet. The question remains how much of that access will be through MS browsers and OSs.

By vision33r on 4/27/2011 10:41:19 PM , Rating: 2
Apple has 3 real cash cows and those are being cut off by Google. Is Apple safe from Android?

Lol, Apple is the most profitable smartphone maker. While Google is showing it's viral strength. Google makes very little money from it. They give it away for free.

When you pit Samsung or HTC vs Apple, none of them can stand up on their own against Apple in sales and profit margins.

Go ahead and add up all the FREE Android phones against the iPhone, they are just free phones and only make Verizon richer.

Apple is laughing at Android, because they have a real vertical market. Something only Google can dream of.

"This week I got an iPhone. This weekend I got four chargers so I can keep it charged everywhere I go and a land line so I can actually make phone calls." -- Facebook CEO Mark Zuckerberg

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