Microsoft ([[MSFT]]) has been on a tear this year, gaining 41%, a move from the low-30s to the mid-40s.
Unfortunately this has mainly been a PE move, and driven by PR. The company's price-earnings (P/E) ratio has ballooned during the period from a little over 13 to over 17. Net income for the June quarter this year, $4.6 billion or 52 cents per share, was actually less than the $4.9 billion, 59 cents per share, earned during the previous June quarter.
What has happened is change at the top, former cloud leader Satya Nadella replacing Steve Ballmer as CEO. (Ballmer has gone on to overpaying for other things, notably the LA Clippers.) This has been accompanied by a lot of talk, and a ton of lay-offs, mainly at the now-acquired Nokia (NYSE:NOK) division. Talk has not been wed to action.
You can expect things to get worse before they get better. Nokia is now on the Microsoft books, meaning its losses are on Microsoft's books. In fact, Microsoft has generally lost money on hardware, as Nadella has acknowledged, saying "We're a software company at the end of the day."
OK, then, why do it? The excuse for buying Nokia was to gain some traction for Windows Phone, but that hasn't happened. The excuse for building the Surface was to gain some traction for the PC, and there the mission has been accomplished, thanks to Intel's ([[INTC]]) new reference design that looks a lot like the Surface. Microsoft's biggest "success" in hardware has been the Xbox, a game platform that has finally become a success, and actually turned in a profit last quarter. Thanks to software.
But wait, it gets worse. Google ([[GOOG]]) Android got 85% of the market for smartphones in the second quarter, and Apple ([[AAPL]]) has nearly all the rest, along with most of the sector's profits. The share for Windows Phone, meanwhile, has gone down from 3.5% to 2.4%.
Game over, Mr. Nadella. You lost. And while Microsoft's attention was focused on games it was doomed to lose, Google started going after Windows in a big way with the Chromebook, with sales now expected by Gartner Group to triple by 2017. Remember, every Chromebook that is sold is not only a lost Windows sale, but also a lost Microsoft Office sale.
Applications, like Office, are the real bright spot for Microsoft. Microsoft has used Office to gain a big position in the cloud, which is good, but if all you're doing in cloud is storing productivity applications and files, you're doing it wrong.
The future of cloud lies in truly cloud-centric applications that can use the firehose of data companies produce and deliver actionable results with them. Microsoft has a play in this space, products like Microsoft Dynamics CRM. But Salesforce.com ([[CRM]]), whose products run on Oracle (ORCL hardware, is actually eating Microsoft's lunch in this area, revenues growing 25% per year, enough so that investors don't seem to care that it loses money like it's Amazon.Com (AMZN.
And there are some amazing opportunities in truly cloud-centric applications. Companies can track customer interactions in real-time and improve them, in real time. They can measure how employees are dealing with one another and build more effective teams. They can do a much better job at organizing and deploying their assets, by analyzing the data they already have.
This is where Microsoft should be putting its money. These are growth markets which should, over time, be moving to giant cloud companies that have the infrastructure to control the data as well as manage and analyze it. Whether Microsoft can compete effectively in this area against competitors like Oracle, IBM ([[IBM]]) and Hewlett-Packard ([[HPQ]]) is not clear, but at least there is growth there.
Instead Microsoft continues to fight the last wars - the market wars it has already lost. This is not going to work out well for shareholders. Sell before bad earnings make you sell. Don't get caught in a reality distortion field that can't really bend reality.
Disclosure: The author is long GOOG, GOOGL, AMZN, AAPL.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.