After a Decade of Stagnation, Is This Tech Titan a Buy, Sell, or Hold?

The past 10 years have not been kind to Microsoft (Nasdaq: MSFT  ) shareholders. The company matured long ago while shares have transitioned from a growth investment to a value one. The stock has done nothing but stagnate over the past decade.

What about the next 10 years? Do they look better than the past 10? Is Microsoft a buy, sell, or hold?

Buy:

  • Cloud: Microsoft was slow to embrace cloud computing, and the movement was even considered a major threat to the company's staple Windows and Office offerings. Google (Nasdaq: GOOG  ) has been pushing two (naturally) free offerings that directly threaten those products: Chrome OS and Google Docs. Despite the tardiness, Microsoft is now showing that it's serious about the cloud.

    Its cloud-based Office 365, which is based on a subscription model, responds to Google's productivity apps. The Redmond giant's cloud-hosting Azure platform will compete with Amazon.com's (Nasdaq: AMZN  ) Elastic Compute Cloud, or EC2, and Mr. Softy is plugging roughly 90% of its R&D budget on investing in the cloud. Microsoft has a lot of weight to throw around, and now that it's fully behind the cloud, it could capitalize on cloud migration, but it will need to clash with formidable players like IBM (NYSE: IBM  ) and Oracle (Nasdaq: ORCL  ) .
  • Mobile: The mobile revolution is the biggest revolution of this generation, and the opportunities are just as immense. Mr. Softy has been late to this game, too, but it has tapped Nokia (NYSE: NOK  ) as a hardware partner to push Windows Phone 7. The operating system is still immature relative to Apple (Nasdaq: AAPL  ) iOS and Android, but if the platform can get off the ground and gain momentum, it could generate a healthy revenue stream off OS licensing. Windows Phone has been getting more OEM backers recently, particularly after Google announced its acquisition of Motorola Mobility.

Sell:

  • Steve Ballmer: If you were to blame Microsoft's lack of punctuality regarding significant trends in computing on bad rush-hour traffic, Steve Ballmer would represent a sweaty dozen-car pileup. Earlier in the year, hedge fund guru David Einhorn called for Ballmer's resignation. Einhorn's Greenlight Capital owns a sizable chunk of Microsoft shares, and Einhorn called Ballmer "the biggest overhang on Microsoft stock." Shares have underperformed for 10 years. Ballmer has been CEO for more than 10 years. Convenient? Not for shareholders.

    It was a huge mistake when eBay acquired Skype for $2.5 billion. Ballmer topped that feat by paying $8.5 billion -- more than triple -- for Skype in a misguided attempt to get into social media. Einhorn has also called Bing a "sinkhole," plunging billions into the search ... er, "decision" engine with little to show for it. Einhorn is absolutely right: Ballmer is stuck in the past.
  • Mobile: As much as bulls like to think of Microsoft's mobile opportunities, bears point to the company's falling market share and the momentum that iOS and Android have already gathered. Odds are stacked heavily against Mr. Softy in mobile, and that situation has no sign of changing anytime soon. The mobile revolution threatens to displace many Windows PCs with smartphones and tablets. It may bring in some dollars from mobile, but they're more likely to come from Android than from Windows Phone.

Hold:

  • Windows 8: You have to give Microsoft some credit with what it's trying to do with Windows 8. Not only is the company trying to unify PCs and tablets on one operating system, but it is also trying to redefine the traditional PC computing experience with the tile-based Metro approach. I think it looks pretty slick for tablets, but the biggest challenge any platform faces is swaying a robust community of developers to give it life. Researchers IDC, Gartner, and Forrester Research think it will bomb, but I think it's a bit premature to write off entirely. Once the OS launches next year, we'll be able to formulate a better opinion on its prospects.
  • Valuation: By just about any historical valuation metric, Microsoft looks cheap. It's even gotten cheaper over time, which is partially a function of its stationary share price and growing top and bottom lines.

    This is also why Einhorn is so frustrated: because Microsoft's underlying business is strong yet it doesn't get "credit for some of its achievements and prospects." Existing shareholders who have held on for years may feel the same frustration, but it always hurts to sell if you think shares are cheap or undervalued.

The verdict
Microsoft is a hold. Some of the company's prospects look promising, particularly those that focus on the inevitable migration to the cloud. Having a strategy is just the first step, though, and Microsoft needs to execute flawlessly to compensate for being so late, and Ballmer isn't the type of CEO who instills confidence in shareholders that he's the man to get things done.

Shares look too cheap right now to justify a sell, and Windows 8 could potentially do better than expected. Investors can hope that Ballmer will be replaced in the near future, but until then, current investors should stay right where they are and hope the next 10 years are better than the last 10.

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Fool contributor Evan Niu owns shares of Amazon.com and Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Microsoft, Google, Amazon.com, IBM, Apple, and Oracle. Motley Fool newsletter services have recommended buying shares of Google, Amazon.com, Microsoft, Apple, and eBay, creating a bull call spread position in Apple, and writing puts in eBay. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 27, 2011, at 9:43 PM, techy46 wrote:

    Buy - Windows 8 will unite enterprise client and servers with consumer mobile client and entertainment XBox servers. Nobody has or can do that other than Microsoft. As soon as the OWS geners have to stop flash mobbing and work in an enterprise they just might ditch their iToys and aRobots.

  • Report this Comment On December 28, 2011, at 3:59 AM, kariku wrote:

    I agree on Balmer -- he's an idiot.

    I disagree on Bing -- it's ok, I'm actually using it (sick of google)

  • Report this Comment On December 28, 2011, at 5:30 PM, TCBMan wrote:

    I have a Windows smart phone and find it hands above android and the iphone for ease of use, one handed use. I smile at how all the info of a contact can be found in one tile, and I appreciate the stringing of texts and how well speaking texts works over typing them. The Windows 7.5 phone is as easy to love as the Windows 7 PC OS.

  • Report this Comment On December 28, 2011, at 11:06 PM, techy46 wrote:

    Buy and hold's dead. Nobody bought and held Apple or Microsoft for 10 ten years. Buy low, sell high and get paid dividends while doing it.

  • Report this Comment On December 29, 2011, at 9:25 PM, DBLBLU wrote:

    Microsoft's cloud efforts will be a money sinkhole just like bing. It isn't obvious but most Microsoft product is moved by resellers who generate their revenue and profit through associated consulting services. By focusing on the cloud, Microsoft is undermining its resellers.

    And as for Windows 8, corporations spent and are spending millions migrating to Windows 7. They aren't going to touch Windows 8. It may be the prettiest UI on the planet but in the corporate world, it's adoption rate will match Vista.

  • Report this Comment On December 30, 2011, at 9:00 PM, melegross wrote:

    The reasons given to hold the stock are a laugh. Hold it because the next ten years can't be as bad as the last ten. If I had MS stock right now, that would have driven me to sell it right away.

    I see more negatives in MS's future than positives.

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