Microsoft (NASDAQ:MSFT) began as a monopoly and then continued to be one. Just now, it seems like the tide may be shifting against it. Apple (NASDAQ:AAPL) products swarm our vision, and the once-unknown computer maker is now grabbing market share away from Microsoft. On the mobile front, it doesn't seem like Microsoft has anything at all - every phone it comes out with seems clunky and unoriginal, which may be why Microsoft has such poor market share in the mobile space right now. That being said, let's not forget who we're dealing with here: Microsoft has a market capitalization of $346 billion and a vast store of patents. With all the growth that Microsoft has undergone, is there still room for more? Let's take a look.
Obviously Microsoft isn't growing as fast as it used to - but it's still growing.
The chart shows us that Microsoft revenue has continued to go up, with some small interruptions. The superimposed rate of revenue growth, however, tells a different story. It seems that some quarters Microsoft rakes in the bills and some quarters it lays stagnant. This kind of revenue growth volatility is odd - shouldn't Microsoft be selling products consistently? The situation is such that there are alternatives to Microsoft's products now - what an economist would call a substitute. Where there is Windows 8, there is Apple OSX Leopard. Where there is a Windows Phone, there are hundreds of competitors. Microsoft can't act like the monopolist it once was - it needs to innovate to continue to thrive. Noting that, Microsoft still has incredible margins. Although it experienced some steep drops, presumably after the 'waves' of operating system sales that it goes through, it still closed the most recent quarter with a net profit margin of 27.74%. Keep in mind that this is the technology sector - everyone who's established gets to keep a nice margin. Yet 27% is still very high, especially considering Microsoft is one of the biggest companies in the world.
Any concerns about Microsoft's financials are unfounded - they are doing very, very well. What we need to know now is whether the stock is at a good point of entry. One measure of this is the historical price-to-earnings ratio. As you can see below, Microsoft is selling at a relatively low P/E; this could indicate that the stock is at a good point for entry. It's just one factor out of thousands, but it's a particularly important one for investment professionals.
Market and Products
Microsoft has its hands in a lot of different markets. A prominent one that is worth considering is the smartphone market. Smartphones are a pervasive aspect of modern culture - everywhere you look, somebody is thumbing away at their device, a device which now tends to have a large screen and myriad capabilities. Sadly, Microsoft does not have a good grip on the smartphone market:
It seems that Microsoft may have already lost the battle. With the amount of capital that they have, however, they can continue attempting to innovate and attempting to disrupt the smartphone market. This hasn't happened yet, and Microsoft has an appallingly low stake in the smartphone industry. One device size up we have the tablet. Here Microsoft is also doing very poorly: the dominant player is Google (NASDAQ:GOOG) (NASDAQ:GOOGL), although the two companies have different distribution policies, with Microsoft also selling tablet hardware (Google only handles the software aspect for almost all Android devices).
Where Microsoft still shines is software. The firm is still the world's largest software maker, led by powerful applications such as Microsoft Excel.
Source: Gartner, Statista
These numbers only make sense once you realize that Microsoft is selling its products for non-mobile devices. That being said, mobile seems to be the hot thing right now, and other firms have established very strong market positions.
Microsoft continues to offer world-class enterprise level and consumer-facing products, some of which have no substitute. Microsoft is, however, being overtaken on the mobile front by more agile competitors. This could mean that they've grown cozy with what they have and aren't as competitive. Yet, Microsoft is massive and has a gargantuan horde of money, patents, and human capital. They can continue to develop new product lines and revenue streams without any worry, simply because the operating systems and productivity software are keeping them so well afloat. Taking all of this into account, if you believe that Microsoft can expand their research and development, hit new frontiers running, and continue selling the software that they sell so damn well, then the stock is a buy right now.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.