Is Microsoft (MSFT) About To Wake Up From The Dead?

avatar By: IS
Date posted: 12.09.2011 (5:23 am) | Write a Comment  (5 Comments)

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Microsoft

MSFT

Microsoft has been known since the start for its software, its operating system Windows changed how we were able to use pc’s while software like Office ended up being used by nearly every pc user around the world. You might argue that things are changing and that it’s far from clear how those will be able to compete in this new cloud based era. I would agree. Certainly, the domination that Windows has enjoyed will probably never be the same. That being said, I don’t expect a crumble anywhere near what Internet Explorer ended up suffering. Building an operating system is complex on so many levels and even powerhouses such as Google and Facebook are facing many challenges in coming up with a viable alternative.

Are Windows/Office and others slowing down? Not significantly. But the booming years of Microsoft certainly look way behind. Just take a look at this MSFT chart from the past 5 years, you will see what I mean.


A New Era?

I do think Microsoft is doing great things though with all of the cash that its software business continues to generates. After paying a reasonable and growing dividend, Steve Ballmer and others have been able to develop promising businesses.

Online/Social

Argue as much as you want, I think this still has to be seen as a success, even though it is proving a very expensive one. Microsoft is putting up billions of dollars into its online business, trying to compete with Google and others through Bing and its other properties. It has proven to be an incredibly difficult challenge which is no surprise. Almost everyone has given up on competing with Google in search but Bing continues to challenge. A remarkable success has also been the early stake in Facebook which not only was a good move financially but it has also helped Microsoft develop a great relationship with what is without question, the new dominant internet player. Facebook, which will become the biggest IPO in a long time to hit the markets in 2012 will be an important partner for Microsoft’s online division. How soon will it be profitable? It’s unclear of course but I personally think that the main priority should continue to be improving the product and the audience, everything else will come.


Gaming

No doubt, many thought Microsoft was crazy to get involved in an industry dominated by Sony’s Playstation franchise. Where are the doubters now? The company has been incredibly successful and continues to be an extremely strong player in the fast growing gaming market with its Xbox 360.

Microsoft Taking Over The Living Room?

Slowly but surely, Microsoft is becoming a huge player in a space where Apple and others are fighting very hard: The control of our living rooms. As Xbox continues to gain market share, it has proven to be a premium place for all entertainment. There were games, links to providers such as Netflix but there is also a growing offering of tv shows, movies and all kinds of other entertainment options. On Black Friday, Microsoft sold 960,000 Xbox consoles in the US alone. A large portion of those users will start using Xbox to access entertainment.

Major Battle Coming Up

Of course, 2012 will be a big year for Microsoft as the Xbox is likely to compete with some type of offering from Apple when Apple comes up with a new product for our living rooms (some type of Apple TV). In the end, it comes down to valuations though and I personally think that Microsoft might turn out to be a very good play for 2012. Will it explode? Probably not. But there is much more upside than downside.

Disclosure: No positions on Microsoft (MSFT)

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5 Comments

  1. Comment by Andrew — December 10, 2011 @ 10:08 pm
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    What is the catalyst for Microsoft? It has been dead money for over 10 years now even with increasing revenues and profits, the stock keeps getting cheaper and cheaper as a classic value trap. I believe that Google will probably release an equivalent OS for free in the future that could challenge Microsoft as its position is currently vulnerable. I would select Google over Microsoft…

  2. Comment by IS — December 11, 2011 @ 6:44 am
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    @Andrew – I think the xbox will end up being a big part if Microsoft can continue to extend its reach… as for an OS, that is possible, but we also were hearing that 10 years ago and I don’t think it could happen overnight.

  3. Comment by Andrew — December 11, 2011 @ 2:52 pm
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    I researched online what the Gaming division at Microsofts represents in terms of its revenues and profits. Gaming accounts for 10% of revenues but only 2% of profits. It will need to hugely expand margins to make a noticeable impact on company wide earnings which I think will be extremely difficult in a competitive video game market.

  4. Comment by vito — December 12, 2011 @ 5:37 am
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    c’mon MSFT seriously?

    The contraction of the PC space, where the company has 98% of its profit, should talk alone.

    How many people these days buy a PC over a tablet?

  5. Comment by Intelligent Speculator — December 12, 2011 @ 7:42 pm
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    @vito – The tablet will certainly be a challenge but honestly, I think that Microsoft’s pc business will remain stable and continue to increase slightly while other activities can take over.

    @Andrew – Very interesting points, many thanks for pointing those out!

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