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.
Not only that, but there are precious few other tech companies that have gotten spanked so hard by regulators litigation about anti-trust issues.
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.
Yes - seriously. The amount of effort (person-hours etc) that goes in inside Microsoft to satisfy litigation demanded regulatory compliance is staggering.
Revenue is going to have a long tail for MS because it takes so long to migrate from one system to another. I think looking at revenue and saying "see, they're still growing! Everything's fine" is a mistake. The important questions are; how much of that revenue is from threatened markets (not just from competitors but from obsolescence as well)? How fast are their new markets growing (they are having success here with at least XBox)?
I like Microsoft, but as a disclaimer before my analysis - I bought 400 shares of Microsoft stock a little bit ago at $25.79 per share.
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.
I've thought about buying MSFT, for the dividend yield if nothing else. But considering how much MSFT is continuing to burn in their online division, and the fact that their two cash cows of Windows and Office are not necessarily stable -- I could see people switching to Office equivalents on iPads, etc., and ChromeOS potentially making a dent in the enterprise market (not having to pay for an extra help desk person for every 25 windows users is huge for a CIO), and with sales of PC down, I'm not so sure their revenue base or their installed base is guaranteed to be stable.
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.
Microsoft reputedly has of a poor record of commercializing their excellent research (they're not alone - e.g. Xerox PARC). It's tricky, which is one reason startups often overthrow the oldguard in the next disruption (as Microsoft itself did).
But your example of Kinect is promising... even if they bought it rather than develop it themselves (idk which), they have commercialized this research.
$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.
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.
Surely it's not about who does your R&D so much as what they produce?
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.
The world is addicted to exponential curves, and yet everywhere we look, we see logistic curves in a finite world. Unfortunately, it is quite profitable to con people into thinking that the latter is really the former. Our whole financial system is built on this fraud, from the VCs on down.
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.
Customers don't need to be excited about your products to make a boatload of money.
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.
Customers don't need to be excited about your products to make a boatload of money.
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.
> 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.
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.
My problem with you're argument is that you're focused on strategies/ideas/potential. Microsoft's strategy has always been simple, dominate every software market. There's nothing inherently wrong with that strategy, probably never will be. No one denies the future potential either. It's about execution.
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.
So while the article notes several times that "Microsoft is not making items that customers want", it seems that this is addressing the consumer customer. But isn't Microsoft addressing what the enterprise customer wants? And isn't this a serious chunk of where their income is coming from.
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.)
"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 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.
Including dividends, MSFT has returned about -44% since Steve Ballmer assumed the CEO position in January 2000. By comparison during the same period the NASDAQ-100 index returned -37%, IBM returned +66%, and ORCL returned +20%.
The problem is that Gates likes him for some reason. The two of them own an a very significant portion of the company and essentially control the board of directors. So Balmer's going to be in charge so long as both he and Gates wants him to.
I agree somewhat with that. I can't place my finger on it, but there's something I don't like about growth needing to be the norm... but that's a whole new topic.
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.
The reason you always expect growth is because as a company retains earnings its total assets grow. You expect that given more money you should earn more money. If you get to a point where you're earning the same amount but require more assets to do so, you are going to get a lower multiple on your earnings. The other option is to payout all your earnings as dividends but the problem there is double taxation(if you live in a country that taxes dividends) which lowers the value of those earnings to the investor.
More fundamentally, the OP assumes that the rise of smartphones (and, it assumes, tablets, but I think that remains to be proven) constitutes a shift away from the desktop platform.
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.
I don't follow MS closely but I thought bill gates was no longer involved. Is he guiding MS with enough influence that (betting against MS == betting against gates)?
He's still the Chairman. I don't have any real information, but, from what we know publicly, no, betting against MS isn't betting against Bill since his involvement doesn't seem significant at this point.
Consumers can react to market changes much faster than enterprises. We are seeing a rapid migration away from Microsoft's product in the consumer space. That must worry MS as this phenomenon seeps into their enterprise business over time.
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.
We are seeing a rapid migration away from Microsoft's product in the consumer space.
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.
Additionally, the predictions about people using a netbook as their only computer seem to have been mostly wrong. This is good for MS, as Windows' licensing fee was too large for a $300 computer. (MS helped this along by refusing to sell cheap Windows for netbooks that were actually capable.)
Is there anyone out there with a background in economics who could explain why it's reasonable to expect a company's revenues to grow indefinitely?
I get that there's inflation, so there will always/usually be some upward pressure, but surely there are natural limits?
It would seem "Wal-Mart disease" is a good place to look for start up opportunities. Look for companies suffering from Wal-Mart disease, then think up ways to compete against them.
I don't really understand where the term "Walmart disease" comes from. Certainly, Walmart is not an exciting company but it's far from poorly managed. The fact that it's stock has been in a holding pattern for a few years does not mean that it's future is bleak.
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.
>The fact that it's stock has been in a holding pattern for a few years does not mean that it's future is bleak.
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.
"There's a difference between the quality of a business and the quality of a management. If it's a strong enough business, it should be able to withstand poor management. If you gave me the number-one pick in the CEO draft, and said he had to run Ford Motor, I wouldn't do it. It would be too tough. A CEO depends on too many things happening that are outside his control, even if he's the best in the world."
-Warren Buffett
"Microsoft has caught the “Wal-Mart Disease” – constantly trying to do more of what it always did, hoping it can regain old results – even as the market keeps shifting. In stalled companies, executives cut costs in sales, marketing, new product development and outsource like crazy in order to prop up earnings. They can outsource many functions. And they go the resorvoir [sic]* of accounting rules to restate depreciation and expenses, delaying expenses while working to accelerate revenue recognition. While Microsoft had higher earnings than last quarter, it wasn’t because customers were excited about their products!"*
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.
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.