Microsoft (NASDAQ:MSFT), which spent years in neutral, transforming itself from a growth stock into a value investment, is suddenly an interesting speculation.
Much of that gain has come down to moves by CEO Steve Ballmer that position it as a "devices and services" company, even though more than half the revenues come from operating systems and business software.
The only real gain the company can claim is from its XBox game machine, which over the last few years has become dominant in the U.S. market over the Sony (NYSE:SNE) Playstation. But Microsoft is risking those gains with the Xbox One, imposing an online requirement on users that has many observers suggesting that the Playstation 4 is a better choice.
Game players have long been used to losing access to their old games with each new machine, but now Microsoft says they have to connect with it regularly in order to even play new games, which it has always insisted are "licensed" and not sold. The move is aimed at killing the used games market, but other than causing a downgrade at Gamestop (NYSE:GME) it hasn't done much.
Microsoft is also trying to generate momentum by taking 600 of Best Buy's (NYSE:BBY) computer departments, turning them into "Windows Stores" through which it can sell devices and phones as well as PCs like its own Microsoft Surface. One can speculate on the success of this, but it would only be a speculation.
What we're left with is a company pretending that it's something it's not. Microsoft is a business software company. That's where its bread is buttered, and where its bread has been buttered. The company is making moves toward extending that business into the cloud era, renting applications and pushing its Azure platform. But Azure is getting creamed in the infrastructure market by Amazon.Com (NASDAQ:AMZN) and it's unclear at this point whether its latest moves - cutting prices on bare-bones infrastructure to Amazon's level - will provide any lift.
In short, I think we have a company that can't really justify its current above-market multiple of nearly 18, and which is betting on a turnaround that remains speculative. Personally, I prefer owning Apple, and I think that if Microsoft can't sustain some significant sales growth in its next two quarterly reports that investors will abandon it.
What do you think?