- Windows phone market share growth in the previous year.
- iOS already feeling the heat in many markets.
- Valuation comparison of the three mobile OS giants.
Mobile OS Potential
Microsoft's (NASDAQ:MSFT) Windows mobile OS has proven to be a steady racer. Statistics from the past nine months show that it has totally changed the dynamics of the mobile OS market globally. It benefited from the overall increase in global smartphone sales. In the previous year, over one billion smartphones were sold worldwide, which is an increase of nearly 39% from 2012. On the other hand, Windows' phone operating system managed to increase its market share from 2.4% in 2012 to 3.3% last year, accounting for an approximately 91% year-over-year increase. Microsoft has managed to compete with other smartphone operating systems such as Google's (NASDAQ:GOOG) Android and Apple's (NASDAQ:AAPL) iOS. These two operating systems had a market share of 78.6% and 15.2% last year, respectively. Android continued to be the market leader, as its market share increased by 58% from 2012.
On the other hand, iOS managed a comparatively minimal market share gain in the same tenure. One of the major reasons was the growing popularity of Windows phones. In January of this year, Windows-based phones managed to overtake iOS in 24 markets. On track with the progress, Windows phones overtook iOS in Brazil as well. It is now enjoying the second position in terms of market share in the country. Earlier, Windows phones lacked the famous apps in its ecosystem, but in the past few months, many major apps were introduced, fulfilling the only gap left. Apple, on the other hand, didn't manage enough to impress the smartphone buyers. With the lack of competitive specifications, Apple's iPhone struggled to boost sales against the wide range of Windows phones available in the market. In the future, IDC expects Windows phones to overtake Apple's iOS in the coming few years. Based on the new Windows phone launches, and the success of the ongoing handsets, I believe Apple will continue to face stiff competition from Windows mobile operating system.
One of the major problems with Windows phones was that Windows didn't come up with competitive specifications in the past. For example, the Nokia Lumia 920 came when there were already quad-core processor phones selling in the market. This is said to change in the future. With the mediocre response for the HTC One M8 and the Samsung Galaxy S5, I expect Nokia to launch competitive Windows smartphones on April 2nd this year. As per the rumors, it will be launching the Lumia 630 and the Lumia 930. Both of these smartphones come from the two extremes in terms of specifications and price.
Along with the new launches by Nokia, Windows mobile will benefit with launches from Sony and ZTE also this year. Last month, after Sony and ZTE, Microsoft signed a deal with Karbonn and Lava Xolo. As per the deal, these smartphone manufacturers won't have to pay any royalty fees for selling Windows mobile-operated smartphones. This will help Microsoft grow its market share at least in the Indian market.
Along with the fundamentals, valuation ratios are a helping hand in getting further understanding about the stock. Henceforth, I have compared the three OS companies. The price-to-book ratio of Microsoft, Google, and Apple are 3.93%, 4.46%, and 3.75% respectively, as per the trailing 12-month period. This clearly shows that Microsoft and Apple both have impressive valuations, when it comes to price-to-book ratio. Still, when considering the debt side of these companies, the stance tends to change a bit. As of the past four quarters, the total debt of Microsoft, Google, and Apple are $23.73 billion, $6.62 billion, and $16.96 billion, respectively. In order to avoid debt, many times companies issue new equity, which directly affect the share price of the company. In this case, Google has an advantage over the other two companies, since it is the least debt-ridden company in the comparison. If we consider the ratio of these companies individually, then all of them are undervalued, as their respective industries have higher price-to-book ratio at 7.4 times, 7.3 times, and 4.2 times.
On the other hand, the price-to-sales ratio of Microsoft, Google, and Apple are 4.01 times, 6.51 times, and 2.79 times respectively, as on trailing 12-month basis. Comparatively, Apple has the best figures, but when considering these companies individually, Apple turns out to be the overvalued stock. The industry average of Apple stands at 1.7 times, while the industry average for Microsoft and Google stands at 4.3 times, and 7.5 times respectively, as of the past four quarters. It is said that a company having low debt, along with a low price-to-sales ratio, is an undervalued stock. Based on this aspect, Google shows the best valuation results among the three companies discussed here.
Microsoft has a fantastic dividend history. Since 2003, Microsoft has provided timely dividend payments every quarter. Alongside, Microsoft raises the dividend in its second quarter every fiscal year. Based on this historic observation, I expect Microsoft to continue its dividend distribution in the coming two quarters at $0.28 per share.
The share price of Microsoft has shown great results since last year. In the last 12-month period, the share price rose by approximately 40% as of March 27, 2014. It's a great sign for investors, as along with dividends they also benefit from the share price returns. With the launch event in the first week of April, I expect a boost in the share price of Microsoft, as the updates and the specifications of the new smartphones seem extremely competitive.
The only thing that worries me is the pace of innovation in the smartphone field by Microsoft. Its competitors are already reigning in the smartwatch market. Microsoft will have to struggle its way in whenever it intends to enter this smartwatch market. Also, iOS and Android have entered the car infotainment market, which poses to be a billion dollar market moving forward. With no announcements for entrance into either of those markets, I feel Microsoft needs to step up its innovation, or else it will always have to struggle its way up in terms of market share in the above-mentioned markets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.