Microsoft
1. Microsoft is spread too thin
While Apple
The Zune music player came five years after the iPod, and it failed to move the needle in any meaningful way and was killed late last year. Microsoft's online services division, or OSD, which stood up to challenge Google
The Windows Phone operating system also has an embarrassingly small market share, even as it has a legitimately innovative interface. Even sadder is that Nielsen's second-quarter estimates peg Windows Mobile's market share higher than Windows Phone's. Windows Mobile is more than 10 years older than Windows Phone, and no longer ships.
Microsoft has simply spread itself too thin and dipped into too many markets, to the point where it doesn't execute well in any of them. It would have been better off sticking to its biggest cash cows. Speaking of which ...
2. The biggest cash cows are under attack
Microsoft's two biggest cash cows are Windows and Office, providing the operating income that foots the bills of the bleeding segments. Office is under direct attack from Google as the search giant pitches its Google Apps productivity suite, and Microsoft is in the middle of trying to transition to Office 365, its subscription-based move to the cloud.
Longer term, Windows is threatened by not only Mac adoption, but also tablets at large that are poised to disrupt the PC market. Of course, there will always be a PC market, but as tablets begin to eat into PC sales, Microsoft will need to replace that lost revenue somehow. Its big tablet push is riding on Windows 8, which I happen to be bullish on, but then again I was also bullish on Windows Phone, and look how the market voted on that one.
Servers remain strong, but Windows and Office both have challenging transitions ahead of them as the markets migrate toward tablets and subscription cloud software for growth.
3. Steve Ballmer
Without a doubt, CEO Steve Ballmer is the most poorly regarded CEO of any major tech company today. Under his leadership over the past decade, Microsoft shares have stagnated. Even with the overall business at record highs, investors don't give the software giant the respect it deserves, and many attribute this discrepancy directly to Ballmer.
This was particularly evident when Greenlight Capital's David Einhorn called for him to step down last year, saying, "His continued presence is the biggest overhang on Microsoft stock." On Ballmer's watch, Microsoft badly missed the boat on mobile, brushing off the threat of the iPhone, while even now the company has yet to make a meaningful push into tablets that have touch-optimized operating systems. The company is still trying to catch up in mobile.
"Microsoft's business has been much stronger than the average company in the S&P in the past five years," Einhorn had said. "Microsoft isn't getting credit for some of its achievements and prospects." Einhorn rightly believes that Ballmer is "stuck in the past," missing out or executing poorly in major computing trends like online search and social networking.
One of these days?
The software giant's core businesses are being threatened by secular shifts in computing, while it lacks the focus to successfully tap growth profitably in its secondary businesses and is led by a CEO who's stuck in the past.
Microsoft should have been focusing on its forte: software. The company has never had a consistently successful hardware business. Entertainment and devices typically generate black ink nowadays, but it's still digging out of a very deep hole. Focusing on online services and cloud software services is the right move, except that Microsoft is unfashionably late and still hasn't figured out how to play profitably.
If the company were to focus on its core strengths and ditch Ballmer, heck, I'd even consider buying shares myself.
Until then, my personal money still rides on Apple, and here's why maybe some of yours should, too. The Motley Fool has just launched a brand-new premium research service, and it's all Apple, all the time.
