The tech market has always been predictable in its unpredictability, but lately movements in this volatile sector have been especially hard to read. We have seen the traditional juggernauts of this era, Apple (AAPL) and Google (GOOG), suffer unexpected stumbles in the last few weeks. Since the turn of the year, Microsoft (MSFT) has surprised many investors, including myself, by clambering out of the "elephants' graveyard".
The once dominant force in the tech market, Microsoft has seen its stock value slowly depreciate in the last few years. In 2012, however, its stock has suddenly rebounded, rising in value by 25%. This rise has been fueled by a number of factors, including the anticipated release of Windows 8. Another, more surprising reason has been an increase in demand for Microsoft's current software. Windows 7 sales have doubled this year, as consumers have made an unexpected return to PCs.
It had been thought that the rise of smartphones could spell the end of PCs altogether, and Microsoft, forever linked with home and office computing, looked to be in trouble. It appears that rumors of the PC's demise have been greatly exaggerated, and many investors have now returned. Some have gone further, speculating that other sleeping tech giants, particularly the long dormant AOL (AOL) may also spring back into life. I would expect to see a bounce in the stock of many established tech companies, but I won't be investing.
The reason for Microsoft's resurgence, particularly in the last week when it has gained 6%, may not be down to PCs at all. Ironically, it could be smartphones, long thought to be Bill Gates' nemesis, that turn out to be the company's savior. It's not the stability of Windows 7 sales, or a nostalgic return to the 1990s, that's getting investors excited. Instead, it's a smartphone partnership with another U.S. tech company many thought to be past its peak.
New horizon for Verizon
Verizon (VZ), the most popular mobile phone network in the United States, has apparently become frustrated with the expense of space-age phones like the iPhone and the troubled BlackBerry, owned by Research in Motion (RIMM).
The network is now rumored to be working with Microsoft to create cell phones that run on Windows. While its network has expanded over the last decade, Verizon's stock value has reached a plateau, gradually sliding from over 60 in the late 1990s to below 30 in recent years. Sound familiar? The phone giant's ten-year line is practically a carbon copy of Microsoft's.
This seems unusual given the mobile phone boom of recent years. The most obvious conclusion to draw is that the network's stock rose to an artificially high level on flotation and the company has lacked the 'wow' factor to draw investors in since. That could be about to change, if its gamble on Windows pays off. If it's a success, it would also represent a massive coup for Microsoft, who have tried and failed to get a foothold in the smartphone market. This could be the reason why investors are tentatively adding both companies' stock to their portfolio.
There are clearly risks to investing heavily in either company. The smartphone market is squarely covered by the tech market's biggest names, including Apple and Google. Verizon is making an aggressive move to get more value out of a market that it's finding expensive at present. To do so, it has turned to the biggest sleeping giant in the game. Verizon plans to design and launch a new smart phone which runs off Windows, in the manner of a traditional laptop or PC.
A brand new product, in a crowded market place, in partnership with a name associated with the very medium the smartphone phenomenon was recently tipped to kill off altogether? This move hardly reeks of a guaranteed money maker. Verizon will have been buoyed by consumers' continued investment in Microsoft's Windows 7 operating system. There is a sense that while trailblazing customers will seek out the most cutting edge technology, there is still a huge market for traditional technology.
My hunch is that Verizon and Microsoft are hoping to tap into an overlooked consumer base - traditional PC users who are still using standard cell phones, and feel unsure about moving on to smartphones. Switching to an Apple or Android operating system can be daunting, if you've been relying on Windows to work, surf or connect for the past decade. Suddenly, this idea seems like a masterstroke.
There's just one problem - the original Windows phone didn't tap into this market, so why would this one? Many found the Windows phone to be unwieldy and poorly designed. It is crucial that this partnership produces a phone that people can pick up and use easily. It will be the design that determines whether this bold new product floats or sinks. If it can carve out a niche in the smartphone market, expect both Verizon and Microsoft's stock to rise. Right now though, Verizon is the better investment. Verizon's biggest competitor, AT&T (T), traditionally the stronger performer on the markets, could be looking over its shoulder.
Microsoft's stock has seen a significant rise in the last few months, while Verizon's has been fairly stable. With investors distracted by increased software sales, they could be missing the real value. I'm prepared to go with Verizon's gamble - to a point. As the product goes through testing, publicity and a high profile launch, surely the cell phone giant's stock is only going one way.
The limelight that has eluded the company for so long will be turned squarely onto Verizon, for the next few months at least. If the product tanks, the stock will fall again, so be prepared to get out quickly. Nevertheless, while others are paying over the odds for Microsoft's newly hot stock, its unlikely new partner in the smartphone age could prove to be a surprising short-term money maker.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.