In recent times, tech news headlines have been dominated by the LinkedIn (LNKD) and Groupon (GRPN) IPOs and the growing anticipation over the FaceBook and Twitter IPOs. When the excitement of such IPOs is not hogging tech news, the all too familiar smartphone and tablet PC wars pitting Google's (GOOG) Android OS versus Apple's (AAPL) iOS has become all but routine.
Some may argue that in many ways, recent buzz surrounding tech stocks including controversial accounting metrics (as was the case with Groupon) is not too dissimilar from what preceded the burst of the Dot-Com bubble in 2000.
This scenario makes what would interestingly pass for 'old technology' stocks such as Microsoft (MSFT), become increasingly appealing. With the stock now trading at about $32, which is a couple of cents shy of its 12-month high, investors clearly see value in owning a piece of the world's largest software maker by revenue.
Its P/E of 11.7 could indicate it is undervalued compared with PC and smartphone competitor such as Apple (P/E of 16.2), smartphone and internet search competitor Google (P/E of 18.1) and database competitor Oracle (ORCL) with a P/E of 14.9.
Despite the unsurprising concerns that greeted Bill Gates' exit from active management, Microsoft has remained on a steady path. Microsoft's continued dominance of the desktop PC and laptop market has ensured a steady revenue stream and almost predictable profitability. In a sense, Microsoft has successfully surmounted the very challenge that faces its old rival Apple with the demise of larger-than-life founder Steve Jobs.
But it has not all been rosy.
Smartphones spell trouble for traditional PCs
Over the last few years, the phenomenal growth of the smartphone and tablet PC market has seen Apple and Google take the lead as Microsoft plays catch up. The fact that some analysts and reputable research firms have predicted tablet PC sales will exceed desktop sales in the very near future would not seem to bode well for major PC stakeholders like Microsoft. The constant threat from open source software coupled with struggling economies in mature markets of the U.S. and Western Europe is clearly not good news for the Redmond giant either.
But as the hype around tablet PCs gives way to reality, several factors demonstrate that Microsoft is in fact likely to benefit substantially whichever way the tide turns:
- First is the role that tablet PCs and smartphones play in everyday life. Tablet PCs are predominantly used for browsing the internet, watching movies or reading eBooks on the go. Smartphones on the other hand find greatest application in browsing the web and checking email in addition to their core purpose of making or receiving voice calls.
While both tablet PCs and smartphones have found widespread use in office and home environments, they are impractical for use in the performance of certain everyday functions such as data entry, data analysis and extensive word processing. To put this in context, think about the ease of typing a five page document on a tablet PC versus doing the same on a traditional laptop or desktop. Compact computing devices also have lower processing and storage capacity compared to laptops and desktops.
- Second (and based on the first point above) is the vast potential of emerging markets. In developed nations, virtually every home and office has more than its fair share of desktops and/or laptops. As emerging economies in Asia, Latin America, Africa and parts of Europe continue to grow leading to new businesses and a swelling middle class, the demand for PCs can only go up. A 2011 Intel investors report showed that the cost of a PC has been on the decline relative to wages. Already, China is expected to be the world's largest PC market in 2012, the first time the Asian power overtakes the U.S. on full-year sales.
- Third, the expected launch of Windows 8 in late 2012 or early 2013 is Microsoft's touch-screen friendly response (albeit belated) to the iPad, iPhone and Android-powered devices. Research firm Gartner's has predicted that Windows-powered smartphones will occupy a 19.5% share of the market by 2015.
Only Android powered devices will have a larger share of the market at 48.8% with iOS slower growth in sales expected to see it confined to a 17.2% share. There is good news for Windows in the tablet PC market too where its share of the pie is expected to hit 10.6% by 2015. The impending success of Windows-powered mobile devices is attributable to the software maker's formidable partnership with giant Finnish mobile phone maker Nokia.
- Fourth, open source will still play second fiddle to proprietary operating systems. When you think about it, this is probably not surprising. At one point, some were predicting Windows would be all but obliterated in a few years by free operating systems such as Linux. But with experienced honed over several years, Microsoft has mastered the art of value add - ultimately, it is not the operating system that matters but the everyday programs that are compatible with the operating system. Even Google's spirited attempts at penetrating the PC market through the Chrome OS in the hopes of duplicating its success in the smartphone market have come a cropper.
If you do not want to bet your money on shaky tech business models such as Groupon, you will be better served placing it in a resilient company like Microsoft. Microsoft's Q1 2012 sales even exceeded analysts' expectations.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
