Microsoft Stores Will Impact Your Tech Portfolio: Here's How

Aug.28.12 | About: Microsoft Corporation (MSFT)

To put it simply, Microsoft (NASDAQ:MSFT) is a huge company that seems to constantly be growing. It was only a matter of time before it began pushing to open more of its own stores, where it will be able to promote its many products and compete better with companies like Apple (NASDAQ:AAPL) that already operate their own stores. This will add to the bad news facing Best Buy (NYSE:BBY) at the moment though. Samsung has begun opening retail stores as well, and this will have a slightly positive effect on Google (NASDAQ:GOOG), but a slightly negative effect on AT&T (NYSE:T), Verizon (NYSE:VZ), and Sprint Nextel (NYSE:S). The impact of this will be incredibly small for now though, and it may not become very important in the future either. I will examine all these stocks in this article, but I believe Microsoft is the one to watch at the moment.

Microsoft is currently trading around $30 and its trailing P/E is 15.40. Microsoft's revenue numbers from March were down from the end of 2011. Still analysts have an average estimate of $18.11 billion for last quarter numbers. This would be a rise of over 4%, though still down from the $20 billion revenue it ended 2011 on. Its EPS is a decent 2.75 considering the excitement surrounding its new products, and it still offers a decent dividend yield (2.63%).

In recent talks, Microsoft CEO Steve Ballmer has been very vocal about the company taking on Apple with confidence. Of course, this has led some to speculate that he is all talk, especially with the way that Apple has taken control of the mobile market with Ballmer in charge of the company. I do not agree with this, however, as Microsoft is set to open a large number of new retail stores that should help it compete with Apple's business model.

By the middle of 2013, Microsoft plans to have 44 retail stores, where it will sell its many products like Windows PCs, games, Windows Phones, and its upcoming Surface tablet. This is part of a larger initiative for opening new stores. Roughly a year ago, Microsoft announced that it wished to open 75 new Microsoft stores in the next two or three years. Of course, this previous goal may have transformed into the current goal, but it is reassuring that the company is taking action to put this plan in place.

As for announced stores, it will open a store in Orlando on August 18 and one in Boston on August 23. To reach its goal, however, Microsoft will have to pick up the pace a little. It currently has 20 retail stores, and to reach its goal of 44 stores, it will need to open 2.2 stores per month for the next 11 months. For now, it is difficult to say whether or not Microsoft will reach its goal. Regardless, new stores will benefit the company. They will also allow Microsoft to take a bigger role in the mobile market, backing up Ballmer's aggressive talk against Apple. As Microsoft has been opening some stores right next to Apple stores, the competitive incentives behind Microsoft's actions are clear. Its actions will affect other companies as well though.

Best Buy is currently trading around $18, at the low end of its 52-week range. At the moment, it is trending downward, and I do not expect this to change. With an EPS of -3.08, Best Buy is going to struggle enticing investors, and that's not even mention its May 2012 revenue numbers being almost $5 billion down from its March numbers ($11.6 billion from $16.3 billion). Its profit margins are still near 0% and, as you will see, nothing here presents any good news for the technology retailer.

Best Buy is one company that may suffer from this development, as it hopes to sell Microsoft products. More stores means there are more possible choices for consumers interested in buying Microsoft products. Best Buy has already been doing poorly, as it has begun to lay off its employees. As it has opted to replace current employees with cheaper options, some have drawn comparisons to the collapse of Circuit City in 2007. The Geek Squad extended repair service will be outsourced to third-party companies, and some have noted that this leads to less incentive for customers to choose Best Buy instead of Apple or Microsoft retail stores.

I do not think this is quite as drastic as some believe, as many consumers hardly seem to care about the way a company treats its employees. I do agree that this could lead to worse customer service though, and with an increasing number of Microsoft stores opening up, more consumers will choose this option over Best Buy. This is not a good time to get involved with Best Buy, and I do not recommend this stock.

Much like Microsoft, Samsung has announced its intention to open retail stores, and it has begun moving on this endeavor by launching its first store. This will not have a large impact on the industry though, especially since this is only Samsung's first store. It will be slightly beneficial to Google though, as this will help further promote Samsung's popular products that are powered by Google's Android operating system. Unlike Microsoft and Apple, however, Samsung has a limited selection of products, making the success of these stores a little more questionable.

Verizon had to delay its Samsung Galaxy S3 release to July 12, adding to the delays from other companies. AT&T, Sprint, and Verizon will all be offering this phone now though, showing how popular Samsung's products are. With this in mind, it is slightly unfortunate that Samsung will begin selling its phones more directly. These companies will still benefit from data plans and should still have access to these phones, but Samsung may take some of their business, especially if it continues to open more stores. I would not worry too much about these stocks at the moment, but I would keep an eye on new retail stores from companies like Microsoft and Samsung, as they may begin to change the relationships between a variety of tech companies.

Microsoft's new retail stores should have a much bigger impact on the industry than Samsung's. Since Samsung's development is rather insubstantial, I do not recommend using this news much to act on Google, AT&T, Verizon, or Sprint stock. It will affect them all, but they will not change much for now. Even in the future, Samsung stores will likely have only a negligible effect on them.

While Microsoft's stores are similar to Apple stores in theory, they will still help improve the sales of Microsoft products. They will likely draw business away from Best Buy as well. While I do not expect this event to have a large effect on Apple, I do think it will bring bad things to Best Buy. As a result, I do not recommend investing in Best Buy. While I think Microsoft will benefit greatly from new stores, I would recommend waiting for the stock to become cheaper, especially since the openings will not happen that soon. After it gets a little cheaper though, I would recommend investing in Microsoft. Its future business looks quite strong at the moment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.