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Eroding Windows sales is hurting the stock price at Microsoft

Microsoft is the largest software company in the world and there is little to indicate that it will cease being the biggest gorilla in the cage anytime soon. Although profits at Microsoft were up and were greater than Wall Street expected, the company has seen its stock plummet and sales of its Windows operating systems are sagging. 

Microsoft offered up the financial details for its latest quarter yesterday. According to the numbers, Microsoft's Windows division saw sales of Windows 7 OS slide. This is attributed in part to the sagging PC sales that were down 1% in the same three month time period compared to a year ago. When PC sales sag, so do sales of Windows since the vast majority of PCs shipped run Windows in some flavor.

At the same time, some of the blame for sagging Windows sales and slowing PC sales is attributed the popularity of other gadgets and devices like the iPad. The iPad and other tablets are encroaching on the PC market in a noticeable way and many feel that trend will only grow.

As a result of Windows losing momentum in the marketplace and uncertainty of PC sales Microsoft has seen its stock price fall 1.2% to $26.37 in trading reports Reuters.

Capital Advisors Growth fund Channing Smith said, "Microsoft to me is no longer a growth stock, but it is a very attractive value stock. They continue to generate tremendous free cash flow. Their balance sheet is really unmatched." He continued, "What you will begin to see is a shift away from growth investors. You are seeing that transition where Microsoft is in no man's land, but I think they will become increasingly more attractive to value investors."

Over the last year, Microsoft's stock has lost 14% compared with an overall growth of 16% for the Nasdaq. While Windows slipped, other segments of Microsoft's business did well and took up the slack. Overall, net profit at Microsoft was up 31% in fiscal Q3 to $5.2 billion amounting to 61 cents per share. After excluding the tax benefit Microsoft profits still met analyst expectations.

Standouts for the quarter included the Office Division which saw a 21% increase in sales to $5.2 billion, and the Entertainment and Devices Division relied on the Xbox 360 and Kinect to rack up $1.9 billion in sales.

The much talked about deal for Bing to provide search results on Yahoo is still not performing as Microsoft had hoped with the division posting a loss of $726 million.

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i don't get it
By Da W on 4/29/2011 11:07:40 AM , Rating: 5
This stock is trading 10 times trailling P/E, possibly 7 to 8 times forward P/E. For starters it means the market forecast almost negative growth for Microsoft, which i doubt although yeah the PC is now a mature market. All this coupled with a nice 2,5% dividend yield which is more than good ol US treasuries (and Microsoft will still be rated AAA for years to come).

Just a comparison. Oracle, 23 times trailling P/E? What does oracle do that is so much better than Microsoft?
Nvidia is 49 times trailling P/E. Oh yeah, the market forceast explosive growth from Nvidia desktop ARM chips since Windows 8 will suppoprt ARM, but microsoft is doomed. See the logic?
ARM holding is rated at 98 times trailling P/E, which would make sence if profits trippled every quarter for the next decade. This is worst than most stock i saw during the dot com bubble.
Netflix is now at 67 times P/E, yeah of course NOBODY can set up a competitive streaming company via the Internet, it's too much damn hard to figure out.

Anyway, microsoft is a good value buy. Just don't buy too much and buy some Apple and Google too.

RE: i don't get it
By michael2k on 4/29/2011 2:08:27 PM , Rating: 1
There is in fact a very real risk that Microsoft will see negative growth, especially if Windows 8 ARM is a hit.

If an AppleTV is $99, then a similarly slim ARM powered Windows 8 business "desktop" can be $99.

So instead of a $50 license for Windows x86, it will be a $5 license for Windows ARM.

Imagine if 25% of businesses adopted such a device in the next two years. Profits might in fact halve because of it.

RE: i don't get it
By AssBall on 4/29/2011 5:23:18 PM , Rating: 2
Apple TV??? Na.... everyone will just have their LCD set up with netflix/hulu built right in, even a browser and a show storage drive, why not?

You will be surprised what Microsoft will be able to do with their ARM software too. Look at the fact that smartphones are getting almost as powerful as an Xbox (Pentium 3 power), and Microsoft has a pretty good OS for that system. Phone7 is not at all bad either.

And businesses need their workstations still, so Microsoft will probably maintain decent profits for the foreseeable future. Xbox4 due in a couple years, their developer tools and business software both sell very well, hell WinXP still sells great in other countries (though often black market style).

Their growth might not be substantial, but their profits will be fine, I reckon.

RE: i don't get it
By michael2k on 4/29/2011 7:56:38 PM , Rating: 1
How can you not see this?

The XBox was a $500 unit; a similarly powered dual core ARM unit (call it an XTV if you wish) would only cost $99, possibly $149. Apple has managed to get an AppleTV (which is identical to an iPad, HW wise) for $99.

So if HP/Dell/Lenovo manufactures a similarly small client for $99 (16gb storage, dual core A9 CPU at 1GHz), Microsoft's cut will be miniscule. There's no way they can maintain decent profits, at all; the Windows Point of Sales units can be handled by such a puny system. The Windows ATMs, the Windows secretarial units, the Windows real estate clients, the Windows actuarial and accounting clients, essentially the entire Windows install base except for those running Visual Studio, Servers, and Games, can be served by a tiny ARM unit.

And if you look at their sales, that means their Windows profits would drop drastically. From $50 per client to $5.

RE: i don't get it
By AssBall on 4/29/2011 9:45:19 PM , Rating: 2
You are making up numbers again.

RE: i don't get it
By michael2k on 4/30/2011 3:01:12 AM , Rating: 2
RE: i don't get it
By fredgiblet on 4/30/2011 3:16:19 PM , Rating: 2
You do realize taht that articel was posted in 2005 right? The hardware costs for the 360 are a fraction of that now.

RE: i don't get it
By michael2k on 4/30/2011 4:09:52 PM , Rating: 2
You do realize I said it was $500? I know it isn't now, I'm saying by 2012 they can muster Win8ARM units for $100 that would be more than sufficient for an office.

RE: i don't get it
By Targon on 5/2/2011 8:23:54 AM , Rating: 2
The hardware costs vs. software is what you fail to understand. Microsoft may have their game console business, plus keyboards and mice, but other than that, Microsoft is NOT a hardware company. Microsoft can see the ultra-portable market is growing, so it looking to take advantage of that market.

The whole move to a very small OS isn't ONLY for these devices either, but is more about "how to make an OS that is not bloated and insecure". By making the overall footprint of the OS smaller, it is far more difficult to infect, and also would allow for the OS to be locked. A big problem with MS Windows at this point is the SIZE of the thing, and that leads to a lot of inefficient code. Focus on shrinking things down, and you not only take advantage of the ultra-portable market, you also make it more difficult to infect. If the registry wasn't such a beast, it would also be far easier to find and identify things that infect the OS.

RE: i don't get it
By michael2k on 5/2/2011 11:49:25 AM , Rating: 2
What am I failing to understand?

I'm saying that with a standard PC they can net $50 licenses ($20 for netbooks) for each sold since these devices cost upwards of $300 or so.

With an ARM powered PC, and a pricepoint well below $200, they would be lucky to get $10 licenses, possibly as low as $5. So even though the market is growing, it's so low cost as to be a risk and not a positive. It's powerful enough that it could displace traditional PCs for a large swathe of the market.

You are the one that seems to miss that. If every office worker got an ARM PC for $150 (including Windows and Office for $10 each), that's the loss of a $50 Windows license and a $50 Office license. Instead of making $100 from a sale, they now make $20.

RE: i don't get it
By Da W on 5/2/2011 9:54:49 AM , Rating: 2
You compare a crap OS like iOS that can only control finger commands and launch apps with a full fledged OS like Windows. iOS/Android/Others sell cheap because they ARE cheap. Even Apple don't sell their OSx cheaply.

Microsoft sure lost their monopoly princing power, case in point. But a full Windows PC will always make so much more than a half-baked 2 cents piece of OS, this is the market Microsoft is going for. It will also run software coded in other languages than java.

Owning a smartphone myslef i begin to wonder if there is a serious app that can compare to a PC software in complexity. Sure fart machines and native app that act as a bookmark are cool, but there's a whole FUNCTIONALITY element that a don't find here.

The key for Microsoft will be if there are new things that you can do with a computer. Of course if all people do is browse the web, send e-mails and watch video then a free Android OS does the job. But then Microsoft is positioning itself to do much more. Voice/face/gesture recognition, IPTV on their Xbox (and may be on windows 8), full reworking of their Zune marketplace (which is pretty good but underapreciated) into an HTML5 web marketplace accessible from every platform to compete in the lucrative streaming market and on and on. I see a world where a phone is not enough. For extra capabilities, Microsoft can charge a premium, and then earn money on other products.

It all comes down to valuation. 10 times P/E with a 13% y-o-y growth is cheap.

RE: i don't get it
By xaders on 4/30/2011 2:58:28 AM , Rating: 2
microsoft has an image problem because they have a visionary like "Steve Job, or Larry Page" to promote their product brand. Bill Gates is retired and Steve Ballmar as a CEO of Microsoft doesnt give that & questions whether he need to step down 'rumors.'
this is like book "Microsoft 2.0" by mary jo foley & read it. microsoft is different now with the antitrust and the company no longer made of engineers and instead lawyers & becoming "big legacy!!"
some articles that cover on this;
1-( &
3-the podcast from ( "windows weekly" saying the same thing with divisions between department & no integration. windows/server dept. dont want input from the mobile phone/tablet dept & etc. overtime the clashing and fighting doesnt get work done. why was windows phone 7 was late & tablets in 2012 and so late.

One good example is Larry Page take back CEO & kicking Eric out because he was a business guy to help build a "public image" for google. Now, that google is big enough because google was once microsoft in the 1990s before antitrust.

id wish Microsoft well and "...if you dont change with the time, you will get leave behind..." so invest in R&D. look how apple without steve jobs and got back to redo the whole company.

"Google fired a shot heard 'round the world, and now a second American company has answered the call to defend the rights of the Chinese people." -- Rep. Christopher H. Smith (R-N.J.)
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