Microsoft (MSFT) is under the spotlight following recent flagship product launches. Microsoft's historic profits have been derived from mass market acceptance (some would say dominance) of its flagship products. Thus the stock price reacts to perceptions of the success or otherwise of these products - and rightly so.
But are current perceptions negatively impacting the stock price a fair reflection of reality?
Let's review some recent bad press bullet points, and for each one summarize the bear case, then examine if there is a counterview.
- Recent departure from Microsoft of Windows Division President Steven Sinofsky. Bear case: the departure signifies Windows 8 is judged by Microsoft execs to be a disappointment and that departure of a key exec at this point of the product cycle is potentially disruptive. Counterview: the departure could be a personal lifestyle or business aspirations decision which has neutral connotations to the company, or it could be a result of personality clashes between executives which could be mildly negative but were already rumoured and thus possibly baked in to existing sentiment. Either way, just after product launch is exactly the right time for a key exec to leave. The decisions affecting the newly launched Windows 8 OS have already been taken and acted upon, the departure may impact the next product refresh cycle in 4 years or so, but won't impact Windows 8.
- Microsoft tablets come in two flavours. Bear case: by releasing both Windows RT & Windows 8 Pro, consumers are going to be angry that their legacy apps don't run on RT, and ultimately RT will die as consumers will prefer either Windows Pro or a tablet from a competitor. Counterview: the confusion argument isn't very interesting or convincing. Being priced at the high end of the general tablet market, customers will do at least a little research. I can't see how this is any more of an issue than someone buying an iPad and being confused as to why the apps on their iMac can't be loaded onto it. The decision to offer two versions of the tablet OS is, however, interesting. Microsoft would love us all to buy high end devices and earn something approaching $100 in licencing fee per device. And this is their aim for tablets running with Windows 8 Pro. However, there is a significant size of market for small cheap tablets, such as sub $100 tablets from China and sub $200 tablets from Google (GOOG) and Amazon (AMZN). Microsoft does not want to leave this market to Android. Hence RT. Not only can they go after the low end Android but they can go after the Chromebooks too.
- Microsoft has priced its own brand Surface tablets at the top of the market. Bear case: these tablets will not sell as they are too expensive. Counterview: the prices are comparable or competitive to Apple (AAPL) and premium Samsung devices running iOS & Android. Some will say the competition is better and some will say Surface is better. That makes a market. Some will buy Surface and some won't. Microsoft will reap some revenue, at a nice margin, but the Surface will arguably not become a mass market product selling hundreds of millions of units - and that is the exact intention. Microsoft wants its hardware partners, Dell (DELL), HP (HPQ), Lenovo etc. to make tablets. They don't want to be in a price war with their partners, but they do want to offer a benchmark to kick off the product launch and give early adopters a nice product with the full backing of the Microsoft support organisation.
- Windows PC sales have fallen 21% in a four week period. Bear case: a recent report by a research firm states that sales of new PCs with Windows pre-installed in the period to Nov 17 was 21% lower than the previous year. Counterview: this is a disingenuous or even deliberately deceptive report. The implication seems to be that sales have dropped following the launch of Windows 8, but the survey period of 4 weeks only covers 3 weeks after Windows 8 was launched. Of course sales of Windows PCs will be low in the week before a major product launch. Who wants a Windows 7 PC the week before Windows 8 comes out?
Where does this leave Microsoft stock? The market has taken to the bear case side of the argument, which seems to have been overstated. The reality is that Microsoft is in a strong position at the start of a new product cycle. And MSFT the stock is on sale.
Disclosure: I am long MSFT.