Why Not All Earnings Are Equal; Microsoft Has the Wal-Mart Disease
blogs.forbes.com
blogs.forbes.com
http://ycharts.com/companies/MSFT/revenues_ttm#zoom=5
MS revenue has continued to climb to this very day, with only a drop during the recession. Outside of Apple, there aren't many companies that wouldn't take this type of revenue growth at this size.
The article makes a mistake a lot in the tech sector make which is that if MS isn't doing better than Apple then its in serious trouble. Doing worse than Apple is hardly an insult. There are probably no more than a couple of companies in the world that are doing better than Apple. Yet, there are few F500 companies that can match MS's revenue/profit growth -- yet almost all can beat its market cap growth.
It was only 13 years ago the idea of Microsoft offering a free web browser bundled with their OS was considered dirty pool. In fact, in the EU, Microsoft is still facing issues about bundling a media player for free with it's OS.
Imagine Apple having to install a Zune store and Amazon store along side iTunes with every iPhone or iPad they sold.
Here my thoughts:
-Microsoft's price/earnings ratio is around 10, which I feel is pretty good for a company with a lot of stable revenue base and a chance at upside.
-This article talks about Microsoft's poor performance in tablets, which is true and worrying. I'm not sure Microsoft will make that ground up. They do have an excellent research division, though, and I'm wondering if they can make a strong showing in the next generation of technology after this. I don't know what that'll be, but new input devices should be coming online. The Kinect is amazing, I was really blown away playing with one in Singapore. If Microsoft can build on that to do alternative input and the next generation, they could have a huge renaissance.
-They have a very solid installed base. Government and business are very likely to keep running on Windows and Office. For consumers, even if tablets totally take over - and I'm not sure that'll happen - late adoptors will be buying those pre-installed Windows laptops and PCs just like always.
-$50 billion in cash reserves means they've got a lot of time to figure something out going forwards. Lots of cash + some very stable covering their fixed costs + big research division = seemingly a pretty safe buy with some upside.
I don't think it's a good stock to buy for short term appreciation - it might well go down over the next 2-3 years. But I'm comfortable holding it for 10 years. I think there's a decent shot it pays well in dividends and holds its value and a decent shot for lots of growth and appreciation.
Of course, maybe the house does fall over. Do your own research, etc, etc, etc.
The problem betting with cash resources is that this assumes that MSFT executives will be disciplined in spending it, and more importantly, not spending when an idea doesn't pan out. VC's are disciplined about knowing when to invest more, and when to cut a startup off. If you look at how much money MSFT poured down the Xbox hole, and how they are still don't have a positive ROI even taking Kinnect into account, I don't think their track record is very good on that score.
But your example of Kinect is promising... even if they bought it rather than develop it themselves (idk which), they have commercialized this research.
On the flip side, the only reason Microsoft has $50 billion in cash reserves is that their CEO failed in his valiant attempt to use it to buy Yahoo.
I've got to believe there are more promising companies to invest in, even over the 10-year horizon you mention.
Most of the MS R&D papers I've read have been very good, with excellent ideas. Let's also not forget that GHC is maintained at MS R&D.
The problem lies in converting research into product. One example is the data mountain[1]. The data mountain was way before its time (3d desktop in '98, which is still struggling to make inroads), it's a bad interface for a mouse-driven UI, but a good one for a touch-driven UI (probably not on a phone, but maybe on a tablet and definitely on a 20" or larger screen). But they haven't done anything with it.
I don't think the right stuff from MS R&D is transported to the product development people, which is sad, but highlights one of the differences between Google and MS. At Google a lot of research papers are driven by actual solutions (cf. BigTable, GFS etc). At MS there's more 'pure' research going on and as a consequence the divide between the research people and the product people is larger.
That's what it looks like to me anyway. I don't think there's any problem with the quality of the research being done at MS, quite the contrary.
[1] http://research.microsoft.com/en-us/um/people/dcr/work/datam... (The video sadly seems to have fallen off the web.)
Microsoft ran up the logistic curve, stalled out and, sure, made some bad decisions.
Apple made some bad decisions, went way down the logistic curve, and now is climbing back up it.
That isn't to say there aren't lessons to be learned by looking at the two companies. It is to say that one of the premises of the article, that there is some exponential growth curve that all companies need to stay on, is flawed. I would expect no less from one of the chief financial ponzi rah-rah mags, though.
I don't think anyone is excited to buy gas at $4 a gallon, but that doesn't make it an unprofitable business to be in. MS has been running with out it's founder for years and has been moderately successful.
If one is to believe the reality distortion field that Jobs is central to Apple's success then his health problems pose a major problem to the long term value of the stock.
Apple has some very serious competitive risks (Android) and some very serious internal risks (Jobs' health). Apple's stock price is based on the idea of maintaining 30% growth for the next few years, that's a much more difficult goal than to lose 2% per year. Also, Moore's law is still relevant in the mobile market meaning that people replace their phones fairly frequently to get better hardware support. A mobile phone from 5 years ago is clearly inferior to most people whereas a computer from 5 years ago is mostly adequate for most users. What this means is that there is still time in mobile for a major competitor to emerge. The desktop PC market is locked up and belongs to Microsoft. The desktop PC running Windows is also a core part of the business to a lot of companies in the same way that Mainframes are to the financial industry. Yes, Microsoft's Desktop PC business will continue to decline for years, but it's a steady essentially risk free revenue stream. The mobile revenue stream is still largely up for grabs.
Microsoft also has big inroads into enterprise sales which could solidify WinPhone 7 in the enterprise which would bring in some pretty big bucks.
Then why does Microsoft keep wasting money trying to get people excited about its products? I see what you're saying, which is that there are still strategies Microsoft can use to keep their business going. The problem is that they aren't using those strategies. They keep trying and failing at putting together exciting new products for end users because they just aren't as good at it as Apple.
Agreed, and also the dominant software platform has not emerged yet, like it has with the PCs. The market is still highly fragmented and applications are routinely being written for many platforms. There is still time for someone other than Apple and Google to build something there.
In the meantime, MS has quite a bit of time I think. Those mobile devices will remain "niche" devices for a long time, as these platforms mature. Right now using my phone while i'm outside the house or using a tablet on my couch is great, but that doesn't mean i can dispense with my desktop, where MS is king. That will remain for probably a long time.
The holy grail in my opinion is a single device that i can use as a phone, and also hook up to monitors + peripherals and get a full unabridged desktop experience. Why have two devices when you can have one. Obviously the Atrix is already a step towards that, so i'm not pointing out anything particularly new. Of all the existing players, I think MS is potentially even better positioned than Apple to get in on that game since they already have a lock on the desktop platform.
Dominating market's is hard. It requires incredible leadership and execution. Execution is no small thing, you can't just assume that once you have the idea you will be able to execute. So while it's fine to believe in Microsoft's future, instead of telling me what is possible, tell me why I should believe they will be able to execute.
While I am not seeing flaws in the argument here, I am slightly skeptical, as for multiple decades I have witnessed many people underestimating Bill Gates, and now I wonder if that continues.
(I remember a time where Intel was skeptical of compilers produced by tiny companies such as Microsoft--they got no respect whatsoever.)
I would certainly rate Microsoft's chances much higher, if Bill Gates still held an active role in the company.
I don't understand how a CEO (Ballmer) can last so long at a company with share price effectively flat between $20 and $30 since 2002 (1). Especially in the tech industry -- unless shareholders think the results would be worse without him. MSFT has dividends which maybe offset the flat share price in the investors mind, but oracle (2) and ibm (3) pay dividends and they have had good share price growth since 2002.
(1) MSFT: http://goo.gl/He849 (2) ORCL: http://goo.gl/iNWs1 (3) IBM: http://goo.gl/0W6Kz
Regardless, the opportunity for profit is why people purchase public shares of a company. Profit can only be made by an increase in share price (assuming no splits) or dividend payout (i think).
EDIT: realized there are many other ways to make money (sell short, derivatives based on price volatility, etc) but i think my point is still valid that the shareholders of a company want growth in share price or they'll invest their money elsewhere.
http://www.youtube.com/watch?v=F-QA2rkpBSY
A logistic curve is basically an S-shaped curve, also known as a sigmoid.
There's no reason to believe that this is true, at least for most of MS's customers.
EDIT: after a bit more reflection, I think that while I can imagine a future in which everything runs off mobile devices, that is not possible with the mobile platforms that we have today. Further evolution of the platform would be necessary -- and that could well involve a shift away from today's current leaders (Apple, Google) toward the providers who already know how to provide the computing horsepower that business users and other tasks (PhotoShop, etc.) require.
Microsoft needs a new strategy that keeps it competitive in Consumer, Education, Small Business, AND Enterprise. Retreating to being JUST and Enterprise software company would be a very weak competitive position.
Are we? They have the fastest selling consumer electronics product in history, the Kinect. Windows 7 is selling faster than any version of Windows to date. Office 2010 is selling better than any version of Office.
Consumers never used MS phones. Consumers never used MS MP3 players. Consumers never bought MS tablets.
What we're really seeing is that as certain market segments move to the consumer space, MS hasn't been adopted. So there's no migration away from MS. Rather MS isn't finding as many new markets in the consumer space. But they haven't really lost ground in the consumer space.
You don't want to compete against them - that just puts you in the same market.
You want to find a completely different market that renders them irrelevant.
Walmart as a company has incredible focus at their core competency. It may be true that they've come close to saturating their market but they still do what they do better than anyone else. Microsoft has saturated their core markets, are losing ground in their core business, and have no idea where they're going to go in the future. But hey if they throw enough money at everything they might hit something...
The one thing they do have going for them is that they still have an incredibly smart collection of engineers. If they somehow find a way to get some leadership at the top, they could turn it around much the way Apple was able to turn it around once Jobs retook the reins.
Their stock doesn't move because there's way too much of it out there. I've heard talk of considering it AAA.
>It may be true that they've come close to saturating their market but they still do what they do better than anyone else.
The leverage their market position better than most but I've worked there and I found the quality of the management there pretty appalling. In fact, usually when a manager from Walmart went somewhere else they did poorly. As if they only know how to win when they already have a massively dominant position in the market. The only one who knew how to actually get that position was Sam Walton.
Not only is Hartug's claim regarding Microsoft suffering from Walmart disease unsupported by a substantial evidence, e.g. examples of Microsoft cutting back on marketing - just look at WP7; or outsourcing new product development (one example would be nice), but it also ignores the fact that although one could argue that Windows 7 was more of the same, the Kinect was not exactly what their customers wanted but that it was delivered at the right price and in high volume.
Edit: (or to be more pedantic, they hired Kevin Turner, a Wal-Mart executive to be their COO)