Microsoft (NASDAQ: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 (NYSE:HPQ) has already said that it has no plans for a Windows RT device. The company currently sells two tablets -- the Google (NASDAQ: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 (NASDAQ: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 (NASDAQ:AAPL) which has its operating system in 40% of the tablets in existence today.
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.