Can Microsoft Still Compete With Oracle, Google And Apple?

| About: Microsoft Corporation (MSFT)

By Kathleen Martin

Innovation

Microsoft (NASDAQ:MSFT) and its competitors mentioned here are competing in the software engineering and sales space, and in some cases, such as Google (NASDAQ:GOOG), are competing in the social networking space. Oracle (NASDAQ:ORCL) provides many software platforms and radio frequency identification applications that specifically track consumer behavior with specified supply chain programs, applications that allow consumers to pay for goods in retail outlets using their smart phones and other consumer data mining programs. Oracle operates in a very shallow but wide space, providing these specific services to many different worldwide industries. Both Google and Microsoft are leaders in the web browser space, with Google’s new Chrome offering quickly gaining ground on Microsoft’s Internet Explorer. At the beginning of 2011, Chrome garnered 11% market share and now has over 16%. Microsoft's share fell from 56% to 49%, while Mozilla Firefox has been relatively flat between 21% and 22% throughout 2011. Google’s Gmail offering is disruptive to Microsoft's Outlook program. Apple’s major strength is its consumer offerings which fly off shelves at its international and domestic store locations.

Microsoft’s biggest innovation has come in the form of the X-Box and its gaming platform. Unfortunately consumer forums, blog posts and social networking sites are rife with complaints about the new x-Box dashboard and Zune performance in downloading content. According to these blog posts, not only are the products substandard in performance and usability, but the customer service offered by Microsoft is lacking in any concrete fixes for the users of the products. This remains unchanged at Microsoft, as it has never had strong, responsive and reliable customer service. While Apple (NASDAQ:AAPL), Hewlett-Packard Compaq (NYSE:HPQ) and Dell (NASDAQ:DELL) maintain high ratings for customer experience, Microsoft does not make the top 100.

Fundamentals

Value investors care most about fundamentals. Microsoft’s common shares trade around $25. It has a year high of $29.46 and a year low of $23.65. Its forward price earnings ratio is 8.39. The expected price earnings growth ratio sits at 0.95. Microsoft has a five year average dividend rate of 2% and a dividend yield of 3.10%. A mini-Fort Knox in the making, the company has total cash of $55.94 billion and debt of $ 22.05 million.

Microsoft has paid regular quarterly cash dividends since 2004 which started at $0.08 per share and grown to $0.20 per share this year. Neither Apple nor Google pays a dividend. Oracle has paid a dividend of $0.05 or $0.06 per share since 2004.

Microsoft's gross margin is 77.35%, Apple's 40.48%, Google’s is 65.24%, Oracle's is 77.26%. Microsoft five year price earnings growth is 0.96, Apple’s is 0.58, Google's is 0.89 and Oracle’s is 0.98. Microsoft, Google and Oracle all have high gross margins as they rely on direct sales and third party resellers to move their products, where Apple expends and expects to continue to expend capital on dedicated retail locations. The price earnings growth in all cases also indicates the differences in sales strategies as well as differences in capital expenditures on innovation. While margins remain key to Microsoft's profitability and ultimately its business, I believe that the economic moat surrounding its business is eroding as market share is slowly consumed by rivals.

Is Microsoft Now Value or Growth?

Microsoft’s stock is a stable investment to hold in this market. In order for it to be perceived as a growth stock, Microsoft must increase visionary, big-picture thinking in its corporate laboratories. There is much speculation in blog posts and in the financial press that the corporate culture at Microsoft has stifled innovation. This is a shame as MSFT had great ideas years ago. It was into the tablet market and the streaming market but was never able to produce the goods at a price that made them commercially viable. The founder, William Gates, was heavily involved in these innovations and it seems with his retirement from the day to day running of the company that it is content to rest on its laurels of software design and engineering for home and commercial use.

Microsoft has enough cash and minimal debt to hire some great minds dedicated to innovation. While Apple and Google brands thrive, Microsoft remains tired and apparently resigned to become the elder statesman among young, fresh ideas and go-getters. Oracle has the distinction of offering great customer service. While its product offerings may not be as sexy as the ones offered by Apple and Google, Oracle has maintained a loyal customer base through quick, responsive and effective customer service.

Microsoft’s situation is certainly not dire in its current form. It has sizable cash reserves, consistent sales of its existing offerings and will continue to upgrade and refine these offerings. Whether this is the time to spend even more on R&D is questionable, as there is still uncertainty with respect to the possible U.S. recession and the European financial crises has yet to show signs of recovery. Innovation in the current economic and capital markets environments is a really tough call as it is hard to justify huge capital expenditures for un-tried products in times when austerity is viewed as the best quality. Microsoft has found itself in the position of a Goliath and now the mentality of one, too. What is needed, instead is a renewed focus on the ingenuity that brought it to its current position. In other words, Microsoft needs to grow now or it will shrink.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.