Microsoft (MSFT) has reported a marginal drop in earnings for its fiscal third-quarter ending March 31, 2012, on a year-on-year basis but an increase in revenue from sales of Windows software and business products. Revenue increased from $16.4 billion to $17.41 billion while revenue dropped marginally to $5.11 billion (earnings per share of $.60 per share) from $5.23 billion (earnings per share of $.61 per share) in comparison with the same quarter the previous year. The consensus EPS estimate was $.58 per share. Almost by default, Apple (AAPL) and Google (GOOG) have become the glamor tech stocks while Microsoft somewhat unfairly is regarded as just another boring technology investment. While Microsoft may not move as fast as I would like a number of important initiatives have been launched that could be the second coming of Microsoft on Wall Street. It is worth examining some of these initiatives in detail.
Easily the most ambitious of Microsoft's initiatives is the radically different Windows 8 that is expected to be launched toward the end of the year. Windows 8 will be a real game changer for Microsoft and many people expect that the upgrade cycle that this software will launch will rival Windows 95, which really pushed the company into the big time. It is important to remember that Windows 8 is not just another Windows upgrade but a genuinely comprehensive and oppressive attempt to provide a unified software platform for every single bit of hardware including tablets and mobile devices.
It is also likely to replace the Windows CE mobile platform, which has received much favorable attention. Of necessity, this is a big gamble especially after the failure of Windows Vista but necessary if Microsoft is to retain its dominant position. Tablets are expected to overtake PCs in sales by the end of 2013. The unified platform will also enable the company to take on the dominant ecosystems in mobile devices namely Apple and Google Android and encourage developers to produce a wide range of applications. Another essential ingredient of the post-PC era is the shift to cloud computing and, to its credit, Microsoft was quick to recognize the importance of the cloud and has launched the excellent SkyDrive as well as other cloud-based services such as Office 360. Once again, the glamor factor ensured that there was a lot more media attention given to Apple's iCloud service as well as the Google Drive cloud storage service but Microsoft remains extremely competitively placed when it comes to cloud service. Indeed, this lack of attention seems to have encouraged it to rebrand its cloud services for a stronger emphasis on consumer attention.
It is surprising that barely one year after Microsoft made its biggest acquisition, the $8.5 billion purchase of Skype, it continues to receive little attention as to how the acquisition fits into the future of Microsoft. It is very evident that this was a big move into the IP communication space and major attractions were the huge user base and advanced technology such as peer-to-peer video chat. Though Microsoft had previously launched communication products such as MSN Messenger, it did not have a substantial presence in the market nor the technology to connect users to traditional phone systems. I think people also underestimated how seriously Microsoft was taking its moves in the communications market.
Another breakthrough innovation from Microsoft is called Kinect, which you may recognize as the best-selling accessory to Xbox 360 video games. Many technical experts believe that the innovation has the potential to revolutionize the way in which we communicate with all our gadgets including computers, mobile devices and TV sets. The magic of Kinect is that it responds to body gestures. In typical fashion, Microsoft did not fully understand the potential of its own innovation and in the beginning, only hackers took advantage. Microsoft finally woke up to the fact that it may have another goldmine and chose 11 start-up entrepreneurial ventures to collaborate in application development such as a complete change in the way we shop online and offline. In addition, big-cap leaders like American Express (AXP), Boeing (BA), and Toyota (TM) are working with Microsoft to develop more Windows-based applications.
Finally, despite patent disputes, Microsoft has announced that it will invest $300 million in the new subsidiary to be set up by Barnes & Noble (BKS), which will focus on the Nook reader and the college textbook market. This is a good deal for both sides because of the benefits that would accrue to both companies. Microsoft will receive a stake in the new subsidiary as well as the chance to develop an application for its new Windows 8 system. It can also be a painless introduction to the e book business with the support of the Barnes and Noble books product line. This should enable Windows tablets to remain competitive against Apple and the iBooks digital bookstore.
Steve Ballmer of Microsoft is not the most inspiring or respected of CEOs, but when you look at all the above factors, Microsoft is well positioned for the future even if it was a little slow getting there. Windows is still a huge part of the personal computing environment and the success of Windows 8 could well make Microsoft the glamor growth stock again. With almost $60 billion in the bank, it certainly has the financial resources to succeed.
In my opinion, you should buy the stock if you believe that Windows 8 and the other initiatives are going to succeed. Given that PCs are losing their dominance, the stakes for Microsoft are huge. For survival, it must necessarily compete with Apple on mobile devices, Google on search and other services, Sony (SNE) on gaming consoles and so on. It is risky but, for a company as large and successful as Microsoft, how often would you get the chance to get in on the ground floor for the second time?
Microsoft is currently hovering around $30. Now is a great time to buy this stock if you believe that Windows 8 will be successful. I think this stock is headed up to the mid $30 range in 12 to 18 months.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.