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Summary

  • $2.5 billion worth of opportunity is being missed in the mobile segment by not launching Microsoft office for mobile devices.
  • The stock is undervalued based on the past and expected growth in fundamentals.
  • Windows XP drama continues.

Microsoft (NASDAQ:MSFT) shareholders have been waiting for a big move in the stock for quite some time now. Despite an impressive increase of over 34% during the last twelve months, the shareholders do not seem too happy with the company, and there is some uncertainty about the stock due to the changes at the top-management. Investors are still waiting for Satya Nadella, the new CEO of the company, to make a move and see what he has to offer. There is a lot going on at Microsoft and if the company plays its cards right; this might be the year the stock really takes off.

Windows XP Drama Continues

Microsoft has been trying to move its users to the new operating system, and it has been three years since the company has been trying to shut-off support for Windows XP. However, the transition is proving to be less smooth than the company anticipated. According to some estimates, Windows XP is currently running on about 29.5% of the total computers in the world, and it powers over 32% of the computers running Microsoft operating systems. So, the efforts of the company to bring these users to the new system are understandable as it is such a big segment. It represents a massive revenue opportunity and the prospect of marketing the new products on the new system. The most recent attempt to persuade the users to switch is the $50 discount on new products. Microsoft is offering a $50 voucher at the purchase of any of its 16 Windows 8.1 products - these products include four notebooks, four tablets, four hybrids and four all-in-one desktops. It is still not clear how successful is this new campaign; however, it is clear that the company desperately wants its users to move to the newer systems and they are using every tool to make it happen.

Microsoft Needs to launch Office for Mobile Devices

Microsoft Office is a vital product for the company, which brings massive revenues. Mostly, the customers are the companies which have strong rules about classified data and do not allow its employees to use their personal computers or tablet PCs in the workplace. However, a large number of users are using mobile devices to supplement their work. Research suggests that this market accounts for $2.5 billion of annual revenue which the company is forgoing. As a result, new entrants such as Quip, Paper, Smartsheet, Prezi, Haiku, Deck, Evernote and Good are taking the mobile segment. This does not include Google apps which are already eating up Office market share for quite some time now.

Quip is one of the leading ones which offers a reasonable service. The documents are formatted in 8.5 by 11 inch size of paper and automatically zooms to fit the screen of a tablet. Since the service is cloud based, the document can be edited in real time with the collaborators without the need of sending attached documents over and over again. Microsoft needs to target this market and come up with a version suitable for the mobile devices in order to capture this segment.

Waiving Licensing Fee

Microsoft has recently made a move which represents a good strategy in the smartphone segment. After we heard that the company is planning to make their smartphones compatible for android apps, it was recently reported that the company has waived the licensing fee for two Indian companies. As a result, these companies can use their operating system in their smartphones. The company mainly made this move in order to increase the market share of its operating system. Further, these two companies cater a market having huge growth rates of smartphone buyers. Microsoft charges $5-15 of licensing fee per smartphone which it will have to let go. Only time will tell, whether giving their software for free would benefit the company in terms of profits. However, it will surely add to Windows based smartphone users.

Here's Why I am Optimistic

The fundamentals of the company paint an interesting picture. Microsoft has more than doubled its revenues over the last ten years and its earnings have more than quadrupled over the same period. However, its stock price has only gone up by about 50% during the last ten years. So, why we have not seen the same magnitude of price movement? Was the stock overvalued to start with? I believe so. Microsoft was trading at much higher levels than the fundamentals warranted and at current levels; I believe the stock is undervalued. At the moment, I believe opportunities of the company outweigh its risks. As I mentioned in a previous article, Microsoft has a massive base and mere renewals will allow the company to enhance its revenues and earnings. However, its efforts to capture the mobile segment (acquisition of Nokia (NYSE:NOK)), cloud computing (a separate opportunity which I will analyze in detail in the next article) and continued growth from the gaming segment will further enhance the fundamentals of the company. If Microsoft is able to properly execute its mobile strategy and derive further growth from the gaming segment; we might see much awaited big move in the stock over the next twelve months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.

Source: Microsoft Will Prove To Be A Good Investment