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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 10:07:30 AM , Rating: 2
You act like tablets can't use bluetooth, USB, HDMI, DVI, or any of the other technologies available to PCs.

Hint; the current iPad has USB input/output, HDMI output, bluetooth keyboard support, etc. This will continue to improve into the future as competitors push the bleeding edge. So all of your complaints? Gone. You can in fact type anything, get things done, play games, etc.

For all intents and purposes, a tablet is in fact an ARM powered PC. The difference is their portability and extended battery life.

By mcnabney on 4/28/2011 10:19:26 AM , Rating: 2
Yep, I bet Microsoft is having second thoughts about raping PC gaming as they pushed the X-box and X-Box 360 platforms. When Windows isn't needed for high performance gaming the more basic functions are fairly easy to reproduce outside of the PC. My VERY large employer is already toying with replacing the laptops that field employees use with tablets. They have both right now, but when the departments start reporting that the laptops aren't even being used anymore, expect tablets only. That will spread across the rest of the company as the tablets gain productivity-centered input/output devices.

By Reclaimer77 on 4/28/2011 10:57:39 AM , Rating: 2
You act like tablets can't use bluetooth, USB, HDMI, DVI, or any of the other technologies available to PCs.

I know that, so? It's still not relevant!

Hint; the current iPad has USB input/output, HDMI output, bluetooth keyboard support, etc. This will continue to improve into the future as competitors push the bleeding edge. So all of your complaints? Gone. You can in fact type anything, get things done, play games, etc.

OH well that settles it, desktops are as good as doorstops now. /sarcasm

Guess what? Laptops had those input/outputs forever ago. It didn't kill off the PC did it? Why are tablets and phones going to be any different.

As others already pointed out, tablets and phones are ancillary devices TO the pc, not it's conquerors.

By michael2k on 4/29/2011 2:27:51 PM , Rating: 2
Actually, smartypants, laptops are in fact killing off the desktops. Have you seen recent sales figures?

US 2010: 26.4m laptops, 20.6m desktops
WW 2010: 15m iPads

Sure, in many developing nations the low cost desktop will still be a better fit than either a laptop or tablet, but the exact same HW that powers the iPad is available in a $99 AppleTV. I expect in 2012 the advent of Windows 8 on ARM will allow someone like Dell to create a $149 ARM powered desktop unit.

The only reason tablets and phones are ancillary devices is because the OS update to make them primary hasn't occurred. That $99 AppleTV I mentioned? Already gets OTA updates without a PC. Those supreme Android phones out there? Also get OTA updates. Within 5 years all these devices will be quite capable of being standalone devices.

By robinthakur on 5/6/2011 5:47:04 AM , Rating: 2
The direction things are going in has been telegraphed by the key players in the industry for quite a while now...namely cloud based storage with devices containing less local storage, and restrictions on what you can install (a la Apple's installing software through a desktop Appstore). The concept of owning what you purchase will be eroded to a point where you are literally just paying to use a service for video streaming, gaming, office apps, social apps etc. This works against the consumer but is the only way that content creators can garner a respectable revenue stream from their content apart from Ad ontent and tracking you.

Conversely, the concept of a full open platform allowing bit-torrent, rampant game and content piracy amongst other things is ONLY in the interests of the consumer, not business and as all previous attempts to restrict this activity has failed, the only way which has met any success is to have a fairly closed system like Apple's. Games have gone to consoles and iOS as they are far more easily restricted where piracy is concerned.

What is interesting, is how this is impacting the traditionally dominant Wintel partnership. Windows is generally not used on any of this new breed of mobile device (or at least I rarely see it) nor it is it likely to be despite the desperate death rattle of Microsoft on this front with an ARM version of Windows.

Desktops are unlikely to disappear completely. They will still exist anywhere that you need or want real processing power, but since the people that want this continues to shrink, as it's only really still researchers, some business users and gamers the industry will eventually reallign itself. I actually think that Apple shows you the way most pc companies will go in the future in that it does not sell that many Mac Pro's or iMacs anymore and sells far more Macbooks, iPhones and iPads.

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