Seeking Alpha
Long/short equity, contrarian, independent research, tech
Profile| Send Message|
( followers)  

The media likes to exaggerate. Sure, Microsoft (MSFT) does some dumb things - Windows RT, anybody? However, the notion that Microsoft is dying is patently ludicrous, and I believe many investors make the mistake of conflating a "dead stock" with a "dead company". I know many retail investors, and perhaps even some professional ones, hate Steve Ballmer and want him on the chopping block, but the truth is that Microsoft has been very well run over the last 10 years. Just because the stock has taken an eternity to grow into its valuation doesn't mean the company hasn't been growing. Let me explain.

Revenue Growth...Record Year After Record Year

So, tell me: if a company is dying, then its revenues should be shriveling up at an accelerated pace, right? Let's see how Microsoft has been doing on this front:

MSFT Revenue TTM Chart

MSFT Revenue TTM data by YCharts

Hm. So its revenues have been growing at a fairly consistent clip since the 80's. Even during the "Great Recession", Microsoft still managed to sustain its revenue base quite nicely while the rest of the world was in economic turmoil. Pretty good for a company that's dying?

But hey - it's easy to grow revenue if you're selling stuff at or below cost, so there must be something wrong with Microsoft's profits...right?

MSFT Net Income TTM Chart

MSFT Net Income TTM data by YCharts

As you can see, "net income" fell off of a cliff, but this was due entirely to a one-time non-cash charge related to an acquisition that wasn't so smart. Sure, management didn't do such a great job with that one, but hey - everyone makes mistakes. We can get a better picture, then, by looking at Free Cash Flow:

MSFT Free Cash Flow TTM Chart

MSFT Free Cash Flow TTM data by YCharts

Yep. $28B of Free Cash flow, nearly a record on a trailing twelve month basis. So, tell me again, how exactly is Microsoft "dying"?

The Android Problem

The big fear here is that Microsoft's lunch will get eaten by Google's (GOOG) Android and Apple's (AAPL) iPad. Well...not so fast. Perhaps Android is competition in the consumer space by virtue of a share of wallet shift. If the average Joe spends $499 for an iPad, he has less money to spend on a new Windows powered laptop. The bet that Microsoft and Intel (INTC) are making is that the notebook and the larger tablets will converge into convertible "2 for 1" devices, and then the 7" - 8" tablets will essentially be standalone.

The problem here, as Charlie Demerjian of SemiAccurate so eloquently points out, is that Windows RT costs $90 per device but Android is free. Sure it comes with a watered-down version of Office, but the argument that Mr. Demerjian points out is that most people buying cheaper tablets don't really give a hoot about Office - they're out to buy something cheap and functional. This is probably why Intel is focusing on getting its latest "Bay Trail" 22nm chips out for Android at the same time as for Windows.

My guess is that Microsoft will eventually give up trying to push Windows RT into 10" tablets and notebooks (seriously, who thought a laptop running Windows RT was a good idea?) and will instead cut out the cut-down Office and sell the OS to OEMs for ~$10 or so. This will help the "Modern UI" gain some more traction by way of cheap, decent devices that can only run "Modern UI" applications. This should also indirectly help the larger, fully featured Windows 8 tablets/convertibles, as they will have a richer suite of "Modern UI" applications as well as the legacy desktop ones to choose from.

Android is a problem, but Microsoft isn't going to become irrelevant because of it. But it's this problem that keeps the shares trading so cheaply.

Source: Microsoft Dying? I Don't Think So