While Surface Pro 3 Is A Great Device, Fast Rate Of Adoption Critical For Microsoft's Success

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Discount Fountain
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Summary

  • While the Surface Pro holds great potential for business consumers, uptake must increase at a faster pace to allow for greater earnings growth.
  • The device has performed well financially, with quarterly gross profit in December 2014 being recorded at $210 million.
  • Should uptake of the device stall, then Microsoft risks negative investor sentiment similar to that of the sell-off experienced on January 26.

In November of last year, I had written an article examining whether Microsoft (NASDAQ:MSFT) was overvalued based on both its current and projected earnings. At the time, the company was trading at a price of $49 having since fallen to a price of $43.06 at the time of writing. I had argued that the company needs to deliver significant earnings growth in 2015 or risk negative sentiment on the part of investors. So far, recent events have supported my view. While Microsoft met analyst estimates for Q2 earnings of $0.71 per share on January 26, markets were not satisfied and Microsoft shares took a staggering tumble from $47.01 to $42.66. In this context, Microsoft must deliver high earnings growth to convince investors of its future growth prospects - I had previously commented that a higher P/E ratio of 19.4x was being bid up partly due to investor expectations of future growth.

The Surface Pro tablet, which Microsoft dubs as "the tablet that can replace your laptop," is arguably Microsoft's biggest initiative to appeal to businesses looking to transition from traditional desktops to portable devices, and this represents the company's greatest opportunity to increase earnings going forward. More broadly, the technology represents one of Microsoft's greatest opportunities to capitalize on the portable devices market. Financially, the device has performed well, with quarterly gross profit in December 2014 being recorded at $210 million which is almost double the $122 million achieved in the previous quarter. Revenue from the device itself was recorded at $1.1 billion which was a 24% increase over the same quarter in 2013.

It is important to remember that while the Surface tablet also is being marketed to individual users, the company is by no means trying to win over the die hard Apple (AAPL) fan who will

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Discount Fountain profile picture
4.26K Followers
I am an independent investor with an interest in analyzing stocks across the consumer, finance, telecommunication, and travel sectors. As a data scientist, I also have a great interest in using data tools to better understand a company's financial position.Some examples include:- Aggregating quarterly churn and ARPU data for Deutsche Telekom (DTEGY) and analysing trends over time using SQL: https://seekingalpha.com/article/4516805-deutsche-telekom-growth-potential-remains- Building a Monte Carlo simulation in Python to analyze loss ratios for Zurich Insurance Group (ZURVY): https://seekingalpha.com/article/4459821-zurich-insurance-stock-solid-insurance-company-still-faces-risks- Examining ADR and RevPAR trends by brand for Hilton Worldwide Holdings (HLT) using SQL: https://seekingalpha.com/article/4517248-hilton-worldwide-holdings-an-analysis-of-adr-and-revpar-trendsDisclaimer: All of the author's articles are written on an "as is" basis and without warranty. They represent the author's opinion only and in no way constitute professional investment advice. It is the responsibility of the reader to conduct their due diligence and seek investment advice from a licensed professional before making any investment decisions. The author disclaims all liability for any actions taken based on the information contained in any articles published.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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