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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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By Smilin on 4/29/2011 11:34:15 AM , Rating: 4

Windows and Office are both huge cash cows but MSFT would still be a completely profitable company without them.

Apple has solidified an iron grip on it's markets but would nearly go bankrupt if it lost them. I see no signs of this happening anytime soon but all things change. Android is mostly eating up non-Apple marketshare as well as growing the market as a whole.

Google is more worrisome. There is search advertising but that's it. They cannot seem to get any second cash cow off the ground and frankly the tiny bites from bing are starting to have an effect. Android drives search advertising but otherwise generates no profit and the thing will remain a litigation time-bomb for a while yet.

I thought Google TV was a winner: Innovative product and it got in early in the market. Now it seems Google doing what Google does (stealing intellectual property) backfired with the major networks. Xbox is beginning to look like a winner in the IPTV space and MSFT will earn profit on it, not *just* added search traffic.

By Smilin on 5/2/2011 9:53:13 AM , Rating: 3
I don't think we disagree. Cloud is indeed their next market but they won't be able to just walk into pure dominance like they did against very weak search competitors. It doesn't gain the attention that mobile and search does but Microsoft is already #1 in the cloud space and gaining momentum, not losing it.

My point was just how dependent on search revenue Google is. They have other products but none of them would support the weight of the rest of the company. MSFT has some 900 SKUs besides Windows and Office and they would still be in the black if they lost those two.

By KoolAidMan1 on 4/30/2011 3:21:53 AM , Rating: 2
Incorrect. Software carries insanely high profit margins. Without Windows and Office being sold to businesses all over the world, Microsoft's net profit would be ridiculously low. The profit from their hardware, even taking the Kinect into account, really hasn't amounted to much over the last five years of the XBox 360's lifespan.

Microsoft is software sales, end of story. Lose Windows and Office and they lose the main thing that keeps them afloat. It is what pays for all of their loss leaders.

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