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The announcement by Microsoft (MSFT) that the next version of Windows will be Version 8.1 and be made available free to Windows 8 users should end the company's bull run, but it probably won't.

The news means that the vaunted "Windows Blue" will be a bug fix, not a new operating system at all.

The stock has been on a tear lately. Since the start of the year, it's up 27%. Compare that to the 16% gain in the S&P 500 or the 13% gain in the NASDAQ -- it's more. The only one of its peers that can claim a better return to investors during that time is Hewlett-Packard (HPQ), up almost 50% from its historic lows since January.

All this is driven by an assumption of a rising tide lifting all boats. The recovery is real, technology has shown itself to be cost-effective, so the assumption is that Microsoft, and its OEMs, will get this Windows thing right and get back their share of the market.

That's no longer a given. Microsoft is no longer the king of operating systems, having been passed long ago in devices by both Apple's (AAPL) iOS and Google (GOOG) Android. Will Windows 8.1 solve the problem? Signs point to no.

The loss of its Windows hegemony has created a hole in Microsoft's boat that neither its Azure cloud platform nor its Xbox gaming system have been able to repair. Fact is, its revenue for the first quarter was down the previous quarter, at a time when Windows revenue should have been ramping. Its margins have leveled off and its cash position is weakening.

Despite this, investors are willing to pay a premium price of 17.5 times those earnings, while Apple remains stuck at barely 10 despite a higher yield. Amazon.com (AMZN) continues to come on strong in the cloud space, and its AWS API threatens to become the same kind of de-facto standard, and barrier to competition, that Windows was "back in the day."

Microsoft should be doing what Apple is doing, returning more cash to shareholders. But it earned only $6 billion last quarter, and its 23 cent dividend represented one-third of those earnings, a higher payout rate than Apple has. Apple was also able to borrow money for share buybacks at a rate profitable to shareholders, while Microsoft already holds almost $12 billion in debt, and more of it is at higher rates than Apple is paying.

Taken together, there's an assumption built into these numbers that Microsoft has better prospects than Apple going forward, much better prospects, and that's not borne out by the numbers. If the Apple price is rational, Microsoft's is not. Once investors realize that Windows 8.1 won't be a growth factor in Microsoft's earnings for the rest of the year, I suspect you'll see a sell-off.

Either that, or Apple will go on one hell of a tear.

Source: Windows Blue Should End Microsoft Bull Run