On October 26, Microsoft (MSFT) will release its much-anticipated Windows 8 operating system. Yet again, Microsoft's marketing machine is running full throttle to infiltrate the technology conversation with pomp, bombast, and outright propaganda. Microsoft fan boys, of course, will have us believe that Windows 8 will completely revolutionize the personal computer, tablet, and smart phone consumer electronics markets. Meanwhile, devoted Microsoft shareholders bide their time for a product that finally takes this beta investment "Back to the Future" as a story stock.
For more than one decade, we have sputtered along the Microsoft Bridge to Nowhere. Investors are shackled to a corporate culture that mimics ingenuity, instead of creating artistry. On par with a lumbering giant, Microsoft stock has done little, besides pay out regular dividends and track the S&P 500 Index over the past ten years. Unfortunately for shareholders, the modus operandi at Redmond remains to throw cash at hot sectors, while hawking Windows updates to the public every other year. If anything, Microsoft is pitching itself as the poor man's version of Apple (AAPL).
Microsoft is Beta
Microsoft has yet to recover from the devastating "I'm a Mac - I'm a PC" advertising campaign that ran between 2006 and 2009. In this series, Apple personifies itself as a young hipster, who is both chic and functional. Alternatively, Microsoft is the bumbling nerd in a tweed suit, who cannot get out of his own way. Amid this backdrop, Apple markets its revolutionary iPod, iMac, iPhone, and iPad products to trendsetters and counter-culture types. Apple's closed circuit loop of integrated hardware and software further reinforces Steve Job's halo effect. In response, Microsoft embeds its Windows programming as the internal driver within its Zune, Surface, X-Box, PC and smart phone offerings.
Ironically, Microsoft's Trojan horse business model plants the seed for its own destruction. Over time, the Microsoft Windows brand is notorious for accommodating viruses, inciting security breaches, and forcing untimely shut downs. These gaps in performance are largely due to Microsoft's clunky business model that tirelessly attempts to force square pegs into round holes. Microsoft Windows is the common denominator that somehow manages to unite Intel (INTC), Applied Materials (AMAT), Nokia (NOK), Barnes & Noble (BKS), Hewlett Packard (HPQ), and Dell (DELL) as unlikely bedfellows. With billions of dollars on the line, this toxic mix of rivals beneath one Windows umbrella is doomed to fuel small fires at the micro level, while stifling top-down product development for this branch of consumer electronics.
For example, the recent Nokia - Microsoft partnership agreement is quickly degenerating into a fiasco. In February 2011, Microsoft literally boarded a plane for Finland and deposited briefcases full of cash at Nokia headquarters. One year later, Microsoft, AT&T (T), and Nokia unveiled the Lumia - Windows smart phone. Rapper Nicki Minaj danced the night away at Times Square to headline the spectacle. In response to a minor technical glitch, of course, Nokia paid out a $100 rebate on each phone sold and effectively gave this phone away for free for one month. On April 19, Stephen Elop, Nokia CEO, described Lumia sales as "mixed" amid the hysteria.
Recently, The Wall Street Journal reported that Microsoft refuses to offer the Windows 8 upgrade on existing Lumia phones. Simultaneously, Microsoft entered into an agreement to provide software for Huawei Technologies, a Chinese handset maker. Yes, Microsoft often throws its own partners under the bus for the almighty dollar.
All original equipment manufacturers (OEMs) have taken note of Microsoft's bully tactics. Over time, the fallout from this trend will silently destroy prospective Windows 8 profits. Rather than risk being shunned by Microsoft in a botched deal, OEMs are more likely to reserve their creative energies for taking the Apple route and developing integrated products in-house. J.T. Wang, Acer CEO, has already amped up the tough talk. According to Business Insider, Wang orders Microsoft to "think twice" about its own Surface tablet, that it "is not something [Microsoft] is good at."
Microsoft is playing a game of chicken. A less than stellar Windows 8 release would ultimately force yet another reordering of the consumer electronics space.
Windows 8 Specifications
Microsoft is hell bent upon selling the idea of Windows for the personal computer, tablet, and smart phone. This strategy stands in stark contrast to the Apple model that calls for different operating systems for each platform. With a flexible operating system, consumers can customize their Apple experience through seemingly infinite web-based applications.
According to Dan Costa and PC Magazine, Microsoft brass is taking a "huge gamble" that consumers are clamoring for Windows functionality. Investors are banking that the uniform software will alleviate the confusion of starting up multiple consumer electronics products throughout the day. I, however, would argue that Microsoft's heavy-handed tactics are similar to the very same arrogance that destroyed Research in Motion (RIMM). Rather than solely concentrating upon the consumer experience, RIM technocrats forced a series of BlackBerrys onto the marketplace that only the IT elite could appreciate. With Windows 8, Microsoft risks sliding down a slippery slope of even more alienation for OEMs, consumer gadget junkies, and young professionals.
For example, Windows 8 applies touch screen technology across smart phone, tablet, and personal computer platforms. Yes, users will have the capability to reach out and touch their desktops to execute commands. Behind the Metro design touch interface, users will be greeted with familiar icons that match the desktop experience. Alternatively, consumers can organize Microsoft Excel spreadsheet data via their smart phone and tablet platforms. These Microsoft gimmicks will prove disastrous, if serious workers reject a touch and drag PC screen, while giggling teenage girls refuse to crunch data on smart phones. Microsoft, it seems, never got the memo that smart phones have evolved into fashion accessories.
Windows 8 will include Internet Explorer 10 web browsing, Adobe Flash video, Windows Defender security, X-Box Live gaming integration, and File Explorer to manage documents. Minimum PC hardware requirements include a 1 GHz processor, 1GB in RAM (2GB RAM for 64-bit), and 20GB worth of storage. For tablets, minimum hardware requirements include 10GB of storage space, a 720p camera, and a graphics card with a WDDM 1.2 driver.
The PC has long been commoditized and sales are flat. For Microsoft, the booming tablet and smart phone markets hold the keys to growth. In all likelihood, the Microsoft 8 will prove to be business as usual for shareholders.
The Bottom Line
Microsoft, with its AAA rating, is the epitome of a cash cow. In its most recent 2012 annual report, released on July 26, Microsoft closed the books with $63 billion in cash and investments. This liquid position is more than enough to cover Microsoft's $33 billion in current liabilities and $11 billion in long-term debt. In terms of cash flow, Microsoft generated a staggering $32 billion in net cash from operations, which is a 19-percent increase over last year's levels. Microsoft, of course, is a behemoth and the nominal beauty of its financial statements is nearly interchangeable with that of ExxonMobil (XOM).
The stock market, however, is a pricing mechanism that discounts future growth. Last year, Microsoft posted $17 billion in net income, which breaks down to $2.02 on a per share basis. Microsoft's earnings performance shows little change over the past five years. If anything, the five-year record appears random and averages out to $18.2 billion net income and $2.08 earnings per share. Because of its global scale and commoditized product, Microsoft is effectively a leading economic indicator. As such, Microsoft profit growth has stalled out alongside decade-long economic stagnation within The West.
As an investment, Microsoft is a tech stock in name only. Similar to a utility, Microsoft dominates a particular market segment that generates stable levels of cash. Instead of reinvesting profits back into the business for anemic growth, Microsoft serves its shareholders best by paying out dividends. Indeed, Microsoft has nearly doubled its annual cash dividends declared per common share from 52-cents to 80-cents over the past two years.
At today's $31 per share, Microsoft trades for 15-times earnings and offers a 2.6% dividend yield. Alternatively, Apple also trades for 15-times earnings, while also growing profits at a 66-percent average annual clip these past four years. The $260 billion Microsoft Corporation is effectively dead money. Microsoft Windows 8 will not change the game. If anything, Windows 8 launch will further reinforce Microsoft's reputation as a faceless, conservative operation that trudges along. Adjusted for inflation, Microsoft's real return will be zero well into the near future.