Recently I was asked if Microsoft constitutes a good investment today. Talk about a loaded question! First of all, please consider the commentary here as just a small piece of what you will consider when making your decision. Investments in general involve the much bigger picture of your risk tolerance, risk profile, financial goals, and existing assets. Having said that, what do we know about the company today? Microsoft is a $237 billion company with net income of approximately $15B on $70B of revenue over the past four quarters. It has low debt and pays about a 3% dividend. Clearly, it is a large, healthy company not going away anytime soon.
Now, what about the much more interesting question of its future? We know that the world's largest software company which has dominated the PC desktop market is transitioning to be a bigger player in the "hardware" and "services" space. Earlier this year, this was becoming clear if you were paying attention to their acquisitions, product pipeline, and 10-K. Steve Ballmer's letter to shareholders then removed all doubt. This move is not surprising as desktop PC sales are plateauing/declining and tablet devices and smart phone sales are climbing. Most will agree this is not a fad, but a long-term shift to more mobile, ubiquitous, and lower cost computing. Windows RT and 8, and Microsoft Surface are the latest manifestations of the giant's strategy.
The question then becomes how well will they execute on their new strategy? They are pretty much "all-in" on this shift. Admittedly, things looks shaky right now. Surface sales so far have been "modest". Microsoft has a non-compete agreement with their long-time hardware partners, so you won't find Surface at your local Best Buy for example. Surface is only available at Microsoft stores. In Hawaii, you're hard-pressed to even find one to play with. Anecdotally, reception amongst early adopters is luke warm with scattered complaints about lack of applications. Meanwhile, the device market is teeming with compelling substitutes from Apple, Samsung, Google, and Amazon.
As for Windows 8, corporate customers will be slow to adopt this new touch-based OS. Some entrenched users will find it difficult to adapt or let go even though it supports both keyboard+mouse or touchscreen. Many organizations are still thinking about upgrading from Windows XP to Windows 7. To top it all off, Microsoft's President is leaving the company shortly after launchin....
In the business "services" space, Microsoft is playing catch-up behind first-movers like Amazon AWS with their Azure cloud hosting platform. They foresaw the coming of cloud computing and the huge paradigm shift, so I wonder why they appear caught off guard. Office365 looks like it has tremendous long-term potential, but compelling alternatives like Google Apps break the monopoly-like grip they once had on office productivity apps. On the consumer services space, how many of you have heard of SkyDrive, versus how many of you have heard of Apple iCloud?
I think what troubles me most about the giant is when I look at what they are good at versus the playing field today. Historically and culturally, they have been good at copying other people's innovations, refining it, and doing a better job at bringing it to market. Today's game is about relentless, light-speed, almost daily innovation and succeeding at those ventures more often than not. I wonder how well "i'll-come-in-later-and-do-it-better" will work when the first mover doesn't leave much room for "better" anymore. When I think about Microsoft's own innovations, particularly in the devices space in the past decade, I think of an endless graveyard. Anybody reading this uses Tablet PC? Pocket PC? Zune? Kin? Windows Mobile? They bet the farm on Surface, so hopefully it doesn't end up on this list as well.
Ultimately, I am hard-pressed to see tremendous upside for the giant. To be sure, they will enjoy strong revenue streams in the business sector for years to come. Let's not forget Xbox360 is the number one gaming console in the U.S. also. But going back to the original question of investing, if you already own shares it's not a time to panic, though some profit-taking might be in order. If you're looking to invest new money, it might be a good idea only if you're satisfied with 3% yields. Otherwise, you're probably better off looking elsewhere for strong capital gains.