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Renee Ann Butler is a freelance finance writer and former management consultant with over 15 years of experience in business management and strategy. She earned an MBA in financial management from Exeter in 2007 and has enjoyed a variety of international business experience, working primarily in... More
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  • Microsoft Looks To Cloud For Xbox One, But Is It Worth Your Investment?

    Physical media is so 2000 and late. First, CDs gave way to digital music thanks largely to Apple (AAPL) iTunes. Then, buying DVDs started to fall to the wayside as more people turned to services like Netflix (NFLX). Now, Microsoft (MSFT) is changing the way people game.

    Xbox One

    Microsoft's new Xbox One, available in November, does things a little differently. The system operates in the cloud. This means users can access their games from any Xbox One -- your entire game library will be stored in the cloud whether you install your game via disc or digital download. However, there are restrictions -- games will stop working if you go 24 hours offline and you can forget about loaning, renting, or selling your games, except to approved retailers.

    At its E3 press conference on June 10, 2013, the company announced that it would be releasing 13 next generation titles available exclusively on Xbox One -- including the new Forza Motorsport 5 which allows user "drive-a-tars" learn the way you drive and uses that profile to race competitors even while you are not playing -- but that doesn't mean Microsoft is kicking Xbox 360 to the curb.

    A New Xbox 360

    Xbox 360 will still be around. In fact, Microsoft announced a new version of it available June 10. The new device has a look similar to the Xbox One -- all dark and sleek -- and it is quieter. But, that doesn't mean Microsoft wants you to buy one or the other over the Xbox One. In fact, the company is trying to drum up sales through its gold member program. Beginning July 1 through the release of Xbox One, Gold members will receive two free game downloads, including titles like Assassin's Creed II and Halo III.

    Don't worry, the upcoming releases of Grand Theft Auto V and Final Fantasy XIII will still be available on Xbox 360 -- as well as the new World of Tanks, which is only available on Xbox 360.

    Fundamentals

    Microsoft's E3 conference may put a pretty spin on its Xbox business, but less than a quarter of the company's business comes from online services and entertainment. The real question for investors is whether or not the company is worth the investment -- and right now, things are not looking good. Microsoft is trading at $35.30 on a 52-week range if $26.26 to $35.78, with a one-year target estimate of $34.36.

    What's more though, looking at the company's current fundamentals compared to its past performance, there are some big warning signs.

    Microsoft's operating margin is at 29.5%. This may be higher than 75% of the companies in its industry but it is on the low end of the company's performance over the last 10 years, during which its operating margin ranged from 24.5% to 50.9%. Microsoft's revenue growth has also slipped, coming in at 7.5% on a 10-year range of 6.3% to 15%. And, insiders are noticing. David Einhorn slashed his fund's position in the company by nearly 44% during the first quarter, while Steve Cohen cut his stake by roughly 70%.

    Conclusion

    The new Xbox is only going to take Microsoft so far. The tech titan has been pursuing restructuring toward a more "devices and services" oriented company and launching some other efforts such as discounted rates on its Windows RT (a version of Windows 8 for tablets) and pushing its Office platform to the cloud (Office 365) -- but that doesn't mean those efforts are going to push Microsoft into generating large returns for investors, especially over the short term.

    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.

    Jun 10 1:47 PM | Link | Comment!
  • The Rise Of Mobile: Dell And Hewlett Packard Struggle To Remain Relevant

    Tablet usage is on the rise. In fact, worldwide tablet shipments are expected to outpace total PC shipments by 2015. Mobile computing started as a novelty -- I mean how many people really need to check their email or Facebook constantly -- and grew in momentum with the economy. It is simply cheaper to buy a tablet than a PC. As sales volume of tablets has increased, the average price point has gone down. It is a self-perpetuating cycle.

    There is also a variety of companies looking to use tablets to streamline operations and add value to customers -- from small businesses like Morguen Toole in Meyersdale, PA or Dino's Coffee Company in Olympia, WA, to car rental giant Hertz (HTZ), which is looking to install in-car tablets in its rental fleet later this year. Quite literally, tablets are everywhere.

    Background

    Companies like Apple (AAPL), gained an early foothold in the tablet market. It was an early mover, but the company also did a good job finding the sweet spot with regard to screen size and pricing. Even now, so many years since its debut, Apple's iPad leads in tablet web usage with an 82% market share.

    But what about the other computer manufacturing companies, the ones that don't have the tablet market share like Apple?

    Dell (DELL) and Hewlett Packard (HPQ), two of the top PC makers by shipment, devote a fair share of their businesses to PCs and laptops -- Roughly half of Dell's sales comes from PCs while around 28% of HP's sales are owed to its PC business -- but that market is contracting. The International Data Corp estimates that PC shipments will fall nearly 8% this year, up from a previous forecast of a 1.3% decline -- and even that figure may be generous. In the first quarter 2013 alone, PC shipments sank 14% compared to the same quarter one year earlier.

    Strategy

    Both companies are looking for ways in which to remain relevant in a market that is increasingly more mobile oriented. Dell and Hewlett-Packard have each tried to breach the tablet market, but with different strategies. Hewlett-Packard currently offers two tablets -- one has a 7" screen and runs on Google (GOOG) Android while one uses Microsoft (MSFT)'s Windows 8 and has a 10.1" screen. HP's Android tablet is priced less than $200 while its Windows 8 tablet is roughly $700 -- straddling Apple's iPad price point, starting at $499 for an 9.7" iPad and $329 for an 7.9" iPad Mini. Hewlett-Packard is essentially trying to compete on price on its smaller tablet, matching size and price with Amazon (AMZN)'s Kindle Fire HD tablet.

    Dell also offers three tablets, all of which run Windows 8 and range from $399 to $999 -- two 10" models and the higher-end 18.4" portable desktop. The company is preparing to debut a fourth model by the end of the year -- an 11.6-inch tablet that includes a hinged keyboard. The company is gearing its efforts more towards making laptops that function like tablets. This is hardly the innovation that has pushed Apple to the forefront of the tablet market, but it could be a start in the right direction. After all, just because PC sales are declining, it doesn't mean that consumers won't still need a device that has the power of a "larger" computer.

    Fundamentals

    Dell's PC shipments dropped 11% quarter over quarter, less than the industry average -- but that is hardly a consolation. Looking at the fundamentals in the company's most recent earnings report its sales fell 2%, gross margins dropped 1.4%, and notebook sales slipped 16%. Dell's share price has been rocky thanks to the momentum surrounding the privatization of the company, but analysts are still encouraged. The company is trading at $13.37 on a 52-week range of $8.69 to $14.64 and carries a one-year target estimate of $13.92. That may make for a lower return if consensus estimates are correct, but the company also offers a 2.4% dividend yield, which could make it worth a longer term position. However, Dell's pricing right now is essentially broken. All the buzz surrounding the proposed buyout and possible privatization of the company is skewing the numbers.

    Compare that to HP, the company that launched the low-priced Chromebook in February this year. It recently boosted its EPS guidance over consensus estimates. However, its second fiscal quarter was dismal at best, largely because of a drop in PC sales. The company's profit dropped 32% and revenue fell 10%. That said, cash flow did increase for the company. Either way this is company that is trading at $24.76 on a 52-week range of $11.35 to $25.47, with a one-year target estimate of $22.56. Like Dell, the company also offers a 2.4% dividend yield but in this case that would do little more than make up the difference if the stock falls as much as analysts are predicting.

    Conclusion

    As the PC market shrinks and more people look for ways to have big computing power in a portable format, Dell is introducing products that fill that niche. There are also bound to be those users who prefer keyboards but need an exceptionally portable computer, and Dell is filling that need with its laptop-tablet hybrid devices.

    However, buying into Dell could be a bit late in the game given the current buyout attempt. While I think that the company's upcoming laptop-tablet hybrid could be a huge hit and momentum alone could drive Dell's share price higher, there are less risky investments out there which offer much more potential upside.

    Right now, HP and Dell are both best left as holds.

    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.

    Jun 04 6:22 AM | Link | Comment!
  • Microsoft Restructures Ops, Discounts Windows RT For Tablets, But Is It Too Little, Too Late?

    Microsoft (MSFT) has had its hand in a lot of pies since its founding in 1975, and it has been met with a lot of success historically. The software giant is the company behind Windows and the popular Office suite of products. It also offers online services such as Bing and a variety of enterprise services. Lately, the company has been missing the mark somewhat -- its Windows releases have been fraught with problems -- but it is still a solid performer, at least over the long term. Shares are up just 23.37% from January 2010. Year to date, Microsoft shares are up 28.31%.

    The Future of Microsoft

    The company is trying to address those issues. In a letter to shareholders last year, Microsoft CEO Steve Ballmer talked about turning the company into more of a "devices and services company". Ballmer explained, "This is a significant shift, both in what we do and how we see ourselves - as a devices and services company. It impacts how we run the company, how we develop new experiences, and how we take products to market for both consumers and businesses."

    Now Ballmer is pushing for that even harder. According to people familiar with the situation, a massive restructuring is underway at Microsoft. Reportedly, fueled by increased investor pressure and influence from major shareholder ValueAct Capital, the reorganization efforts will push several execs into bigger roles and simplifying its management structure. In a recent speech, ValueAct's Jeff Uben said "Microsoft could be the largest cloud company in the world" -- maybe that gives a clue to where the company is headed? After all, its most recent release of Office, called Office 365, puts the software in the cloud.

    The Tablet Market

    Microsoft is also struggling to break into the tablet market -- so much so that the creator of Windows and Office is discounting Windows RT, its version of Windows 8 designed for tablets. Microsoft hasn't made public the amount it charges companies to use Windows RT for its tablets, nor has it released the amount by which it will discount the software. Obviously, a lower cost could potentially lead to a higher rate of adoption -- who doesn't love lower prices? manufacturers included -- but the company could really be clutching at straws.

    The worldwide tablet market weighs in with a value of around $64 billion, but Microsoft is seeing precious little of that. Enthusiasm for its software just isn't there.

    Hewlett Packard (HPQ) has already said that it has no plans for a Windows RT device. The company currently sells two tablets -- the Google (GOOG) Android based Slate 7 and the HP ElitePad 900, which runs Windows 8 Pro. Samsung (OTC:SSNLF) did develop a tablet which runs on Windows RT but then the company decided to limit the numbers of markets in which it would introduce the device. Acer (OTC:ASIYF) recently announced a new Windows 8 tablet and another with Android, but the company is steering clear of Windows RT. Chairman J.T. Wang called the platform "very immature."

    It seems the only companies interested in Windows RT are Dell (DELL), which is working on a tablet that uses the operating system, and HTC (OTC:HTCKF) has plans to use it on a 7" model. This means the only other tablet other there which uses Windows RT is Microsoft's Surface. To put this in perspective, Windows RT was in less than a percentage point of tablets in the first quarter -- compare that to rival Apple (AAPL) which has its operating system in 40% of the tablets in existence today.

    Conclusion

    Microsoft may be going full steam ahead with restructuring and its efforts to gain a foothold in the tablet market, but it just seems like it is too little too late. The company is currently trading at $35.59 after reaching a new high of $35.63 on June 3 after news of the restructuring dropped, but the stock has already dipped under $35 a share in after hours trading. Moreover, consensus estimates put Microsoft at just $33.95 in the next year -- a decrease its 2.6% dividend yield doesn't even touch.

    Microsoft may well have a future in cloud computing, and its restructuring may streamline operations and increase shareholder value -- but it isn't going to happen overnight. Investors would do well to watch the stock. Microsoft has the potential to deliver but it will go down before it goes back up -- changes take time. Wait and buy in low for a longer term position.

    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.

    Jun 03 5:30 PM | Link | Comment!
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