If You Think Microsoft Is Dying, You Need A Reality Check

| About: Microsoft Corporation (MSFT)

If you search the news for the word "Microsoft" (NASDAQ:MSFT) you will find hundreds of articles that are talking about how Microsoft is failing in every front, and how it is about to collapse. However, I choose to take a more contrarian view and look at what Microsoft has done to strengthen its position and expand to new markets.

But before I tell you what everybody is missing, let's take a look at the issues people raise when they argue that Microsoft is a broken company.

  1. Windows 8 had a mediocre release compared to the release of the previous version, Windows 7.
  2. The Surface RT and Surface Pro have non-existent sales compared to Apple's (NASDAQ:AAPL) iPad.
  3. Windows Phone is a joke and nobody uses it since they can have an iPhone or an Android phone.
  4. Windows store has too few applications, nobody wants to write applications for Windows 8.
  5. Google (NASDAQ:GOOG) is going to kick Microsoft's butt with Google Docs and its Chrome OS.
  6. Bing is a total waste of money since it hasn't gained much on Google for many years now.
  7. Bureaucracy along with the stack-ranking system has paralyzed Microsoft employees and has drown all creativity within the company. Just look at Zune, Windows Vista.
  8. Steve Ballmer is a terrible CEO, he laughed at the iPhone, the iPad and Google's Android only to have Microsoft humiliated by them.
  9. The company is stagnant for the last 10 years as is well demonstrated by its stock.

I think I covered the major Microsoft-is-doomed points, but if you have more just post them in the comments. You can read more about how "doomed" Microsoft is here and here.

Now let's examine these points one by one:

1. Windows 8 represents a fundamental change to Microsoft's OS and as such it is quite normal that people didn't rush to buy. After all Windows 8 was designed with touch-enabled devices in mind and people who don't want to buy a touch-screen desktop/laptop/tablet have no reason to update yet.

Comparing Windows 8 sales to those of Windows 7 is simply misleading. Windows 7 was launched after the Windows Vista failure and people bought it in large to get rid of Vista. However that isn't the case with Windows 8 since Windows 7 was a very successful windows version.

2. Moving on to tablets, we have the constant critique that the Surface RT and Surface Pro have performed terribly against the iPad and the Android tablets. Well, who cares? The Surface RT was more like a teaser device about what's possible in Windows 8 and how it would work for tablets. Microsoft isn't competing against its own OEMs, it just raised the expectations bar to push them to create exciting hardware.

People (especially some tech journalists) seem unable to understand that the Surface Pro is a de facto ultrabook, not a tablet. The Surface Pro is about what future laptops can be and how Windows 8 really bridges the gap between the classic PC and the new touch-based world. Again Microsoft is just setting a high expectations bar to push OEMs to deliver.

3. Windows Phone 8 isn't a joke, it has doubled its sales and will quickly surpass BlackBerry (NASDAQ:BBRY) to become the third major player in the smartphone market.

4. The Windows store has already surpassed the 40,000 mark for Windows 8 applications, and a new app called Bluestacks can bring to your Windows 8 device every one of the 750,000 existing Android apps. We shouldn't also forget that Windows 8 is compatible with all the programs and apps that were created for previous versions of Windows. And there are millions of those available.

5. Google's Chrome OS isn't yet an all-purpose operating system and it probably never will be. It's great for surfing, reading books or watching videos, but that's about it. Many years will pass before it will pose a real threat to Windows, but even then it will most probably fail for the same reason every competing OS has failed so far, the software ecosystem.

Although it may use a lot of Android apps it is highly unlikely it will match (in the foreseeable future) the number or the functionality of the millions of Windows programs available. Google may be able to create a viable emulator at some point, but I wouldn't bet on that happening any time soon.

Google Docs is essentially a cloud-based version of the Open Office (remember that?). Although it offers some great sharing and collaboration features, people will still have to go back to Office for heavy-duty tasks. Furthermore, after the launch of the Office 365 Microsoft has really eliminated every advantage that Google Docs may had.

6. Bing now owns essentially 28.6% of the search engine market since it also powers Yahoo's results. Furthermore, Microsoft has embarked on a campaign to prove that Bing is a better product than Google, and so far it has succeeded. Although Bing won't defeat Google any time soon it has proven to be a worthy adversary and is a useful tool for improving other Microsoft products, according to Microsoft's CFO.

7. To all those who think that Microsoft is done innovating, I really urge them to find a Windows 8 machine and give it a test-drive. I also urge you to read my article "4 Reasons Windows 8 Will End Apple's Market Share Growth - And Why Apple Shouldn't Care" to find out just how far ahead Microsoft is with this piece of software. Furthermore, the company has successfully introduced the Xbox along with Kinect and it's about to launch its next version raising the bar even higher. And don't forget, Windows Phone 8 and the Surface products.

There is one caveat though. Microsoft could have done even better if it had a better and less cutthroat evaluation system. But this issue along with excessive red-tape will ultimately go away as the company matures and moves ahead. Every company (even Apple) will face excessive red-tape problems at some point, and Microsoft isn't an exception.

8. Indeed Ballmer has made some pretty awful predictions but you know what? He doesn't need to get everything right - only the most important things involving Microsoft.

During Ballmer's 12+ year tenure Microsoft's revenue grew by 290% from $25 billion to $73 billion. Diluted earnings per share grew 386% from $0.66 to $2.55 (excluding a $0.55 one-time charge). This is the exact opposite of how bad performance would look like, don't you think?

You should also consider this as if Microsoft was your own:

Would you prefer a cool-looking "professional" CEO to run it, or a super competitive, no-nonsense guy that is so passionate about the company he isn't afraid of making a fool out of himself when promoting its products?

(I would go with the second one.)

9. The fact that Mr. Market prices Microsoft so low is just irrelevant when valuing the company. The management teams of public companies' aren't (and shouldn't try to be) stock price manipulators. They should focus on growing their businesses, not second-guessing what would look good in the eyes of stock brokers and Wall Street analysts. And as far Microsoft is concerned its management has done a pretty good job.

The Future

In a recent interview (watch after the 44:15 mark) Bill Gates talks about Microsoft and reminds people that Microsoft is a software company. He specifically said in reference to Apple, Google, Facebook, Amazon and Samsung:

"[...] none of them understands software that deals with complex information like Microsoft does."

He also emphasized that the "magic of the future" lies in services like visual and speech recognition and other cloud based services that are software-centric and play on Microsoft's strengths. He specifically described a future when we will do almost everything in the cloud. In that future the key elements are software and user interface, where he believes Microsoft has a great advantage over the competition.

Final Thought

Closing I'd like to make a point. Of course Microsoft faces many challenges and problems ahead, both from within the company and from the outside. Having said that, I believe it is extremely naïve to let ourselves overlook the great products and services the company still creates and delivers. Like it or not Microsoft has conquered a very prominent place in everyone's digital life and it is only going to strengthen and expand this position, not lose it.

And don't forget MSFT is super-cheap at just below 10 times its 2013 EPS, it has a great balance sheet with more $6 per share of net cash and an 11% 10-year average EPS growth rate.

I believe this is the perfect example of a great company at a great price.

Disclosure: I am long MSFT. 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.

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