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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 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".

"I mean, if you wanna break down someone's door, why don't you start with AT&T, for God sakes? They make your amazing phone unusable as a phone!" -- Jon Stewart on Apple and the iPhone

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