Just a short while ago Microsoft (MSFT) took a $900 million dollar charge against inventory, because no one wanted to buy its Surface tablet. And before the whole incident was forgotten, Microsoft rolls out two new tablets codenamed Surface 2 and Surface Pro 2.
This time around Microsoft probably got the message, and has delivered a much better tablet for the money. In addition, Microsoft is giving something to everyone. The entry level Surface 2 starts at $450 and the high end Surface Pro 2 goes all the way up to $1800.
Generally speaking reviews have been good and the new Surface 2 tablets now run up to 10 hours, according to Microsoft. For me, the only reason to have a tablet or a portable PC device is for the independence. Anything with less than 5 hours of uptime is not worth buying. So the fact that Microsoft has made devices that run as long as Apple's (AAPL) MacBook Air, I think is something to cheer about. In addition, the Surface Pro 2 tablets have good gaming capabilities. That was also a smart move, since most of the people who buy tablets do so for entertainment purposes.
The question is, will the Surface 2 sell and will Microsoft eventually gain traction in the devices space? The answer is yes for several reasons.
1) Money hoard: Microsoft has a lot more money to lose than most of its competition. Microsoft, if it so chooses, can undercut the competition and can give tablets for free it wants. It can afford to make countless mistakes over and over again, until it eventually makes a device people will buy in bulk.
The back-to-back release of the Surface 2 tablets is probably part of that strategy. It also shows that Microsoft does not want to waste any more time playing catch up anymore. I think it has probably gotten its act together as far as being more aggressive, and that I think this strategy will register higher overall market share soon.
2) Nokia: I have long said that in order for Microsoft to be able to make a dent and take a big piece of the devices space, Microsoft needs to control everything from the ecosystem, manufacturing, suppliers and so on. With Microsoft's recent acquisition of Nokia's (NOK) devices division, it is one step closer to becoming a devices maker and controlling the whole operation. For me, it was the correct decision to make and it should have been made a long time ago.
3) Ecosystem: There is also another reason why Microsoft will eventually gain traction in the devices space. By virtue of the fact that 91% of the world's desktop systems run on Microsoft Windows, eventually many people will chose tablets and smartphones running on the Microsoft ecosystem, so that they can sync their devices together.
With the exception of Apple getting a much bigger share of the desktop space, it is inevitable that Microsoft will eventually take market share from everyone, mostly from the Google (GOOG) Android space.
Even if Microsoft loses market share in desktop systems over the years ahead -- and I think it will because Google's Chrome PCs are a game changer -- Microsoft will still control the lion's share of the desktop space. For that reason alone, I think people will buy more devices running Windows 8, be it Surface tablets or Nokia smartphones.
Microsoft still has very strong cash flows and has a lot of money in the bank, and can afford to burn some of it in order to buy market share and innovation.
However there is a downside to all this. Until the time comes that Microsoft does get a very big piece of the tablet and smartphone space, it will make a lot of mistakes and will probably take several charges against inventory in the future. Especially if Microsoft is going to be as aggressive as I think it will, judging from the back-to-back release of Surface tablets.
In other words, it will not be a free ride and Microsoft will probably incur a lot of losses in the process. And if I am correct in this, that also probably means that Microsoft's stock might continue to lag the market as it has done for many years now. However, in defence of Microsoft, many years ago Microsoft's stock was a bubble, today it is anywhere from cheap to reasonably valued.
Any way you slice it and dice it, Microsoft has the cash to buy market share and innovation. The move to buy Nokia is part of that aggressive strategy and the back-to-back release of its Surface tablet is another.
In addition, since over 90% of the world's computers still run on Windows, it's only a matter of time before Microsoft takes market share in the devices space from everyone, be it tablets or smartphones.
However, all this might come at a price, since Microsoft's aggressive stance might cost the company losses along the way, and might be a headwind for the stock looking ahead.
So do you buy the stock? As I have said before, I think Microsoft is a great stock for long-term conservative portfolios. And if I am right that Microsoft will eventually gain market share, the stock will eventually break out and reach all-time highs at some point. However, I don't know if that will happen this year or in three years from now. In the meanwhile however, if you decide to buy, at least you will be getting a decent dividend, because the downside is extremely limited.