Investors hoping for a turnaround in PC sales and Microsoft (MSFT) must have their hopes dashed following a disappointing report about PC sales that point to a Post-PC world. Major Wall Street firms rushed to downgrade the company, which now trades at a forward PE of 9.21 -- down 4.82 percent on an up-day for Wall Street. What should investors do?
As we wrote in previous pieces, they should focus on the company's transition from PC to mobile business most notably on the sales of Windows surface tablets, both the RT and Pro versions. The RT version was released last October, and had lower than expected sales in the fourth quarter; Microsoft only shipped about 900,000 of them. Apple (AAPL), on the other hand, shipped around 22 million iPads in the same quarter. On February 9th, Microsoft released the Surface for Windows 8 Pro, a chance to redeem its Surface tablet line and pick up sales. Unfortunately, Microsoft may be making a big strategic mistake by overpricing the tablet.
The Windows surface tablets, which I praised in a previous article, had the potential to compete in the tablet market against Apple's iPad, with its unique work/enterprise usability due to its built-in keyboard and Microsoft Office support. However, Microsoft's price point on both tablets, with the RT version starting at $499 and the Windows 8 Pro Version starting at $899 are uncompetitive price points for targeting the mass market. In fact, the latest tablet prices have been moving in the opposite direction, with the Apple's iPad Mini starting at $329 and Google's (GOOG) Nexus 7 at $249. To make matters worse, Microsoft did not include the touch/type cover in the base price of either tablet, a fundamental aspect of the Surface tablet's competitive advantage over other tablets on the market. The free version of Microsoft Office included with the Surface for Windows RT isn't included in the Pro version either. So when all is said and done, a fully equipped Surface Pro can go for over $1,100.
Surface for Windows RT
Surface for Windows 8 Pro
iPad (3rd Generation)
NVIDIA (NVDA) Tegra-based ARM
Intel (INTC) Core i5 (Ivy Bridge)
10.6-inch ClearType HD (1366 x 768)
10.6-inch ClearType Full HD (1920x1080)
9.7-inch Retina Display (2048×1536)
Windows RT and Office Home & Student 2013 RT
Windows 8 Pro
2×2 MIMO Wi-Fi
2×2 MIMO Wi-Fi
4G LTE, Wi-Fi, Bluetooth
32GB or 64GB
64GB or 128GB
16, 32, or 64GB
Touch Cover, Type Cover, VaporMg Case & Stand
Touch Cover, Type Cover, VaporMg Case & Stand, Pen with Palm Block
microSD, USB 2.0, Micro HD Video
microSDXC, USB 3.0, Mini DisplayPort
Source: Engadget.com, Apple.com
At these price points, Microsoft is pricing itself out of the tablet market. Only die-hard Microsoft enthusiasts would be willing to purchase the Surface Pro at around double the price of tablets already on the market. The majority of customers looking in that price range would rather purchase a more fully equipped Ultrabook or Macbook. Therefore, instead of gaining ground in the tablet market, Microsoft may end up cannibalizing its own laptop market by taking away market share from its OEM laptop manufacturers that support Windows 8 OS.
Qtrly Revenue Growth (yoy)
Qtrly Earnings Growth (yoy)
Operating Margins (%)
Microsoft's Surface for Windows RT/Pro tablets had the potential to be a game changer in the tablet arena with its superior work/enterprise usability. However, Microsoft made a big strategic error by overpricing the tablets, especially the recently released Surface Pro. Therefore, conservative investors may want to stay away from Microsoft's stock for the time being. On the flip side, if pricing is the only problem, highly risk tolerant investors who believe that Microsoft will be able to reduce the price of the current Surface tablets or potential future generations of the product may decide to buy and hold the stock for the long-term and collect a hefty dividend while waiting for the turnaround.