Avoid Microsoft For The Long Haul

| About: Microsoft Corporation (MSFT)

When even one of your biggest allies bashes you, you can be pretty sure that there's something wrong going on.

Lackluster demand (to say the least)

That's exactly what happened to Microsoft (NASDAQ:MSFT) last week, when J.K. Shin, Samsung (OTC:SSNLF) co-CEO, said to The Wall Street Journal that "smartphones and tablets based on Microsoft's Windows operating system aren't selling very well. There is a preference in the market for Android". That the new Windows devices weren't selling well was already a known fact, but it is clearly much more meaningful to hear it stated directly by Samsung, one of Microsoft's biggest allies. That's because the future of computing looks more and more focused solely on the tablet, with the PC getting less and less of a place in the lives of consumers. To this regard, Mikako Kitagawa, principal analyst at Gartner, last January said:

"Whereas as once we imagined a world in which individual users would have both a PC and a tablet as personal devices, we increasingly suspect that most individuals will shift consumption activity to a personal tablet, and perform creative and administrative tasks on a shared PC".

Indeed, if we analyze PC shipments data, the picture doesn't look rosy at all (see chart for reference): after a great 2010, PC shipments have fallen steadily, just to settle at -5% for the most recent quarters and closing the year down for the first time in 11 eleven years. Initially, analysts thought that consumers were holding off purchasing new PCs while waiting for Windows 8, but when it finally came out it clearly failed to reignite the PC market.

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In terms of units sold, tablets are now actually expected to surpass PCs in a year from now:

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So how is Microsoft doing in such an environment? Samsung CEO's words sure don't sound reassuring, but if we look at the numbers, the actual picture might look even more dreadful: according to Bloomberg, Microsoft has sold a little more than 1 million Surface RTs and about 400,00 Surface Pros since their launch, or bout 1.5 million in total. That's more or less the number of iPads Apple (NASDAQ:AAPL) sells in 6 days, but it took Microsoft more than 4 months to accomplish it. Even more so, Microsoft did expect to sell twice as many tablets (since it had ordered 3 million Surface devices), and in fact analysts were calling for 2 million sold in the December quarter alone, but the actual results came not even remotely close to those estimates: therefore, the company is trailing both its own estimates and the analysts' estimates.

Moreover, a few days ago IDC released their tablet share projections up until 2017, and while we probably have to take these numbers with more than just a grain of salt, there's no question that Microsoft, with a 10% market share in four years, would be pretty much out of the game.

The technical view

Technically speaking (see chart for reference) Microsoft stock looks quite bullish: at end of January it broke out from the pattern it had been stuck for almost three months and has since then steadily risen marking three tops one higher than the other (yellow circles), bouncing off a resistance (upper green line) before braking it to the upside.

Furthermore, the 20-days SMA is proving a good support, but the stock is now confronting itself with the 200-days SMA, on which it has bounced off at the beginning of March (last yellow circle). If the stock does manage to break the 200-days SMA, this nice uptrend (yellow line) could continue further. On the other side, if it fails to, the stock could retrace back in the downward pattern (green lines) it had been stuck since November.

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Closing thoughts

Currently, around 70% of Microsoft's income derives from its Office products and the Windows operating system itself. Needless to say, these products exist (and are profitable) only because of the PC. In a world where the PC gets less and less importance due to consumers shifting to tablets, and with Apple's Mac gaining more market share year in, year out, Microsoft has its only chance of remaining relevant in its Surface and in the other Windows tablet devices. As we learned from Bloomberg, though, Surface devices are selling pretty badly, and as we heard from Samsung CEO, consumers don't seem to want Windows devices at all, clearly preferring Android over them. Therefore, either Microsoft is able to totally reinvent itself (option that I find utterly improbable until Steve Ballmer is no longer CEO), or it will inevitably see its profits shrink.

For the short term, the stock might as well continue its up-trend, both because the technicals are suggesting so and because the market itself quite doesn't seem ready to pullback yet. However, this is clearly not a stock that you want to own and forget about it: Microsoft profits are poised to go down, taking with them the stock. This is actually a stock that you probably don't want to own at all.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.