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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 SalesForce.com Inc. (CRM) and Google Inc. (GOOG) offer rented software, Microsoft finds its earnings under assault on a second front.



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RE: LOL
By themaster08 on 4/28/2011 2:40:08 AM , Rating: 3
I agree wholeheartedly. Sure, tablets will cut into PC sales, due to the amount of people using their computers to primarily consume media. However, there is still very much a market for both a PC and a tablet. That will not be going away any time soon, and by that time Microsoft will have a tablet OS, while still making bucket loads of money from Windows and Office sales.

What I wonder is because people feel the market is shifting towards tablets, how will malware creators react to this? Will their premise to be to shift away from Windows and onto tablets? Is the PSN debacle a sign of things to come?

Tablets in their current form have been out for a little over a year. However because Microsoft haven't released a product yet, investors are cautious. This is absolutely absurd.

Windows Phone 7 was released just a few short months ago, however it has the fastest growing application store of any ecosystem and has massive potential. Major updates are coming faster than any other ecosystem, and with the joint venture with Nokia, the future is looking extremely promising for the platform.

Microsoft don't need to release a tablet OS right now. Google have done that, and they have ended up with a half-baked OS, with a lack of applications and with bugs that should have been ironed out before release. The only thing Microsoft need to do is to get it right, the first time.


RE: LOL
By mcnabney on 4/28/2011 10:08:18 AM , Rating: 2
I really don't see the need for desktop PCs outside of content creation after 2012 or so.

By then, tablets will be running at 2.5ghz and have 4 or more cores. They can be slapped onto a keyboard (see: Asus Transformer), plugged into a Dock and run a larger monitor or HDTV (Xoom), and will likely be running 1080p or better. 95% of PC owners use the boxes for office, email, web, pictures, video, and casual games. Tablets can do all of those things just as well. By the time the next console generation comes out there will be no need for a PC outside of content creation, and even some of that could be done on a tablet.


RE: LOL
By PrezWeezy on 4/28/2011 6:56:27 PM , Rating: 2
And those things you talked about require a different UI to do. You need a UI with big buttons and easily accessible fields on your tablet. On your PC you want as much screen realestate as possible. So loosing all of that to a UI which is developed for touch is going to be a problem. The exact same problem affected the original XP and Win 7 tablets. Creation and consumption are completely different usage types. Trying to make one do the other will end up with both systems lacking.


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