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Sunday, May 12, 2013

Microsoft Missed its Moment to Defend Against Apple & Google

Microsoft SurfaceMicrosoft (Nasdaq: MSFT) might have seen the writing on the wall sooner regarding the migration of web browsers to mobile, but I believe it missed its moment to defend its market share. Microsoft’s development of its tablet, Surface and Surface Pro, may be more indicative of its failure to act quickly enough to counter Apple’s (Nasdaq: AAPL) market share stealing mobile operating system than reflective of progressive innovation. Where it stands now, it has also fallen far behind Google’s (Nasdaq: GOOG) Android system in mobile. As a result, I think Microsoft (Nasdaq: MSFT) will continue to shed market share over time and could become relegated to a shrinking PC market and enterprise segment, unless it can reinvent the reinvented. So, despite the stock’s post earnings pop, I would use recent strength to sell MSFT shares and put the money to more active use. However, let’s put things into proper perspective. This is still a company that just earned over $20 billion in revenues last quarter, and which has various other businesses besides its Windows business. In other words, it has the resources and the current market presence to affect its fate, despite being late to mobile as I suggest.

Microsoft bloggerOur founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.


Apple (AAPL) was able to disrupt two industries at one time when it developed its iPhone, and later, the iPad. Developing innovative electronics that attracted demand from competing mobile phone makers was the obvious win, but what it accomplished and perhaps stole out of the arms of Palm (Hewlett-Packard (NYSE: HPQ) acquired) and Blackberry (Nasdaq: BBRY) turned out to be much bigger than just that. While students, writers and technical & professional Americans use computers for all sorts of calculations, documentation and other work, a great many more people use them just to surf the web and now to meddle in social media as well. As a result, mobile computing devices have been eating into the sales of personal computers and laptops.

Microsoft was late to the game in developing a competing operating system for mobile devices, and many of its partners in PCs and laptops, the Dell’s (Nasdaq: DELL) of the world, missed the boat as well. But while investors have prepared the hanging tree for the lynching of Dell, they are not yet ready to count the PC perennials including Microsoft, Intel (Nasdaq: INTC) and others out just yet. Certainly, I can agree that there remains serious question about whether the tablet can unseat the laptop, especially as innovative laptop makers adapt to meet the competition. In my view, this is the best thing working in favor of Microsoft in its defense against the tablet, and not the possibility of other tablets incorporating Microsoft’s system for mobile. Microsoft’s “tablet PC” or “PC in tablet form”, the Surface is really just one of those new innovative laptops, but for Microsoft to keep share, it needs other laptop makers to pick up after its lead. Obviously, it would also help if mobile adopted Microsoft’s system, which is not entirely out of the question, though certainly stalled by Microsoft’s late start. I’m concerned it may just be too late.

MSFT Chart

Based on my long-term premise, which I believe is reflected in the performance of the stock leading into its more recent pop, I think the stock should still be sold here. It’s my view that the steep climb would better represent Microsoft’s successful challenge to Apple and Google in mobile operating systems (not Surface sales alone), and I do not think we are there yet. According to research firm IDC, Microsoft’s first quarter sales of tablets represented just 1.8% of segment sales. Meanwhile, Samsung and Google posed the most significant challenge to Apple this year.

Tablet Sales (Units)
Q1 2013 Share
Q1 2012 Share
Apple (AAPL)
19.5 Mln.
Samsung (OTC: SSNLF.PK)
8.8 Mln.
2.7 Mln.
Amazon.com (Nasdaq: AMZN)
1.8 Mln.
Microsoft (MSFT)
0.9 Mln.
15.5 Mln.

According to YCharts, Microsoft’s trailing 12-month P/E ratio and price-to-sales ratio are higher than they have been in two years time, and the company still has an important question to answer. Thus, I believe post earnings fervor took hold of the stock and took it too high too quickly in terms of valuation. Given my well-documented renewed concerns about the global economy, even if the company’s market share were not being threatened, I would not favor a historically high valuation now. Therefore, I would sell MSFT here and put capital to other use.

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