Why the Wall Street Journal Is Wrong About Microsoft

| About: Microsoft Corporation (MSFT)

If you picked up the Saturday morning's Wall Street Journal and turned to page B16, you'd have seen the paper's Heard on the Street column entitled "Microsoft's stock deserves a fresh look." Now, there's something to be said for optimism, but I'm here to give you the other side of the story.

Martin Peers, author of the article, leads off with the following statement:

Microsoft (NASDAQ:MSFT) confirmed Thursday its Windows cash machine is under threat. So what else is new?

Uncertainty about the PC market's growth prospects, and what that means for Windows in particular, arguably has been baked into Microsoft's stock price for years.

To take such a flippant attitude towards threats against Microsoft's #1 revenue and profit generator seems just plain silly to me. After all, it's not as if Microsoft is making big money in newer areas of business.

Over the first three quarters of Microsoft's current fiscal year, the company has managed to post an operating loss of $1.883 billion in its online services division on revenue of $1.866 billion. That loss was more than enough to offset the company's $1.188 billion operating profit in Entertainment and Devices - an area the Journal article highlighted for its "increasing profits."

The Journal also claims that

Microsoft's partnership with Nokia means Windows Phone will gain significant market share, although the revenue potential remains uncertain.

First, a partnership with Nokia (NYSE:NOK) offers zero guarantee for market-share gains, nor profits.

IDC recently reported that Nokia's Q1 2011 mobile-phone market share was 29.2%, a significant year-over-loss from the 34.7% figure recorded in the first quarter of 2010. So please, do not come under the ridiculous illusion that Nokia has momentum. Also, Bloomberg News reported on March 7th that Microsoft is paying Nokia more than $1 billion to promote Windows Phone 7. Now why would any rational company pay $1 billion for a partnership with a market-share loser? Was no one else willing to take Microsoft's dollars because they're making too much money selling Google (NASDAQ:GOOG) Android phones?

Now here's what the Wall Street Journal got right:

From 2001 to 2010, Microsoft's net income rose 155% on 147% higher revenue. Yet as of Thursday's close of $26.71, Microsoft shares over the past decade had generated a total return, including dividends, of negative 0.2%, according to FactSet Research Systems.

After Friday's selloff, Microsoft is trading at 7.1 times expected fiscal 2012 earnings, excluding cash. That isn't a whole lot better than Research In Motion (RIMM), which after dropping Friday on lowered expectations, is trading at the equivalent multiple of 6.4. And it doesn't make much sense.

Well, except for the last sentence. The fact that Microsoft is trading at just 7.1 times fiscal-2012 earnings makes perfect sense. The company has given investors zero reason to think that it's going to hit it big with a new line of business.

Microsoft is expected to bring in $74 billion in revenue next year. Do you think that number's going to double or triple any time soon without the company inventing something truly revolutionary? I just don't see Windows and Office helping much in that regard.

I've been calling Microsoft a sell for many years. Why bother when the true tech revolutionaries like Apple (NASDAQ:AAPL), Google (GOOG), and ARM Holdings (NASDAQ:ARMH) are so easy to spot?

Disclosure: I am long AAPL, ARMH.