Earlier this month, news leaked that Microsoft (MSFT) veteran and Windows President Steven Sinofsky will leave the company. We're shocked by this departure, especially considering Sinofsky's list of accomplishments and that he was a potential successor to CEO Steve Ballmer. In addition to spearheading the revival at Windows in the wake of Vista, Sinofsky led Office for several years and was known as a "product guy." Still, Microsoft's shares look incredibly cheap at current levels, while providing investors with a fantastic dividend growth opportunity. We continue to hold the company in the portfolio of our Dividend Growth Newsletter (please see our left sidebar for more info).
However, the wrap on Sinofsky is that he's notoriously hard to work with, incredibly secretive, and he refused to collaborate or share information about his products across segments. Still, it's uncertain whether he was fired, quit, or it was simply a mutual break-up in the wake of Windows 8. Some sources say that he made an ultimatum to the company to name him Ballmer's replacement-though a succession announcement won't occur for several years. In his resignation letter, Sinofsky noted that it was the "right" time to leave after the successful launch of the Surface and Windows 8. We think the company could use some new blood at the top, so we're relatively neutral on this departure, even though we respect what Sinofsky accomplished during his tenure.
In related news, a components supplier suggested that the Surface might only meet 60% of its internal projected sales forecast. This isn't incredibly shocking, in our view, as the company seemed somewhat ignorant of what the market thought about its product, so we think the company was overly optimistic about the Surface's opportunity. Though Microsoft never wants to sacrifice margin dollars, pricing the Surface against the Apple (AAPL) iPad was short-sighted, in our opinion. We think the company should have followed Amazon's (AMZN) strategy with the Kindle Fire HD: price it low to take market share and get people to test out the product. Yet, since Microsoft has a substantial investment in Barnes and Noble (BKS), we think the company decided not to go with the tablet/content model, but rather bet on consumers who don't like Apple and heavy Office users to purchase the product.
At the end of the day, weak sales performance is just speculation at this point, but we also have no reason to believe that the Surface is outperforming expectations. In order to stay relevant, Microsoft is in the process of creating Office that runs on iOS and Android (GOOG). We believe this is the correct move, and whether or not the Surface or Windows RT sells incredibly well, Microsoft has laid the foundation for producing its own hardware. The original iMac wasn't a resounding success, and we think it takes time to establish a reputation for hardware and customer service; a model perfected by Apple, but one being pursued by Microsoft.
Investors continue to focus on Microsoft's Windows business because it's been the bread-and-butter of the company for such a long time, but we think the company's other segments continue to be underappreciated. Shares look incredibly cheap at current levels, while providing investors with a fantastic dividend growth opportunity. We continue to hold the tech giant in our dividend growth portfolio, and the news, while surprising, does not change our thesis on the company. Please click here and here to read our previous take on why we're big fans of both Microsoft's yield and valuation, respectively.
Additional disclosure: Some of the firms mentioned in this article may be included in our actively-managed portfolios.