Why I’m Buying the New Microsoft

For as long as I can remember, Microsoft (Nasdaq: MSFT  ) has been something of an "evil empire." The company controlled the PC market with an iron fist through its operating system and never really made a particularly endearing product. The company's negative reputation and a number of product failures (think Zune) opened the door for a struggling company called Apple (Nasdaq: AAPL  ) to build better products surrounding the PC business (iPods and iPads) and take share in PCs as well. Millions of customers made the move to the chic new brand and Microsoft became a has-been in the tech space.

This has left investors with anemic returns compared to Apple, which is eating Microsoft for lunch.

MSFT Total Return Price Chart

MSFT Total Return Price data by YCharts.

As a shareholder in Microsoft, I've been looking for a reason to sell at a profit and move on to a company with more growth opportunities, but I can't. Despite the earnings miss last week, I've bought into what Microsoft is selling, and I think Windows 8 will be a good release for investors. 

New and improved OS
Microsoft's operating system hasn't really had a complete overhaul since Windows 95 nearly 20 years ago. Windows 8 is a complete revamp that brings common functionality for desktop and mobile users, something not even Apple does.

What really separates Microsoft's operating system apart from Apple or Google (Nasdaq: GOOG  ) Android is the business functionality it brings to mobile devices. The Surface will come with Office and you can turn the Surface into a computer with a keyboard and mouse, something that Apple can't claim. Documents will be available over the cloud, so Microsoft is finally catching up to Apple and Google in that respect.

I'm an Apple user for every device but the new Windows operating system has me intrigued. I would love to be able to work on a tablet word processor but the iPad makes it difficult. I also work in Word, the standard for word processing, which Apple doesn't support in the iPad. The Surface makes word-processing a selling point for its tablet, something that business users will love.

Creatures of habit
The question: Will the new operating system change the game for Microsoft in tablets and smartphones? It may not immediately, but as users become familiar with Windows 8, they may be more inclined to make the switch.

Think about the sheer number of people who will be using Windows 8 in a year or two. They'll get comfortable with the tiled start screen layout, how apps work, and likely get used to using the cloud. Now you go into a store to buy a tablet or smartphone and you're comfortable with the operating system already. There's no need to learn a new interface or store your files in a different location. The Microsoft ecosystem will take care of it for you.

It's the same thing Apple has done with iPhones, iPads, and to a lesser extent, Macs. There may be growing pains as users get used to the interface, but Microsoft has a huge potential base to sell to.

Low switching costs
It's also important to keep in mind that mobile devices don't have the same switching costs as PCs. Just look at how fast Research In Motion (Nasdaq: RIMM  ) and Nokia (NYSE: NOK  ) have lost market share in mobile to see how fast users are willing to move to a new device. Today Apple and Google dominate smartphones and tablets but there is little to stop users from switching. Microsoft has a huge opening if it can get the OS right.

Let the debate begin
Friday is when the wraps finally come off of Windows 8, and there will undoubtedly be debate about its design. When it comes right down to it, over a billion users will have nowhere else to go. Apple still doesn't have a major share of the PC market, particularly in business, and Windows is the default for more computers. When Microsoft stops supporting Windows XP, hundreds of millions of users will have to upgrade, and the choice is between Windows 7 and Windows 8.

I think the choice is easy, and Microsoft may have finally developed a product that will excite users. I'm keeping my outperform CAPScall on the thesis that tablet and smartphone sales with Microsoft's OS will jump. No doubt others will disagree, but the upside is strong for investors.

In this brand-new premium report on Microsoft, our analyst explains that while the opportunity is huge, the challenges are many. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.


Fool contributor Travis Hoium manages an account that owns shares of Microsoft and Apple. The Motley Fool owns shares of Apple, Google, and Microsoft. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw

Motley Fool newsletter services recommend Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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  • Report this Comment On October 22, 2012, at 8:33 PM, Nomadder wrote:

    "over a billion users will have nowhere else to go"

    Remember Vista? A lot of people did avoid that for quite a while. Some of us managed to skip it altogether. Sure, a lot of people did "upgrade" eventually, but did it help the stock price in the end? Let me check the above article. Hm...nope, not so much.

    8 already has a lot of people upset or worried, including developers (in a way I don't remember with Vista). Really, you have to at least be aware of the considerable amount of negative press 8 has been getting.

    Their decision to fragment their market with the ARM/Intel versions of the Surface is another problem. (If you're not sure why a lack of compatibility with legacy programs is a problem, one word: games.)

    I keep finding myself commenting on MS articles recently, which is not something I normally do.

    Most days, I don't care one way or the other about MS or Windows. They just...are.

    Now, MS is doing things that have pushed me to start checking in on the progress of Google's OS (not so hot), hoping that Valve produces something, or that Linux makes something more accessible.

    Now, I can get behind a wait and see attitude with MS. We don't know how things will shake out.

    If the no-backwards compatibility ARM tab fails to make any sort of impact, and 8 turns out to be not such a bad thing, that's fine.

    If all this has you actually enthused, however, you might consider checking for confirmation bias.

  • Report this Comment On October 22, 2012, at 10:56 PM, lucasmonger wrote:

    "I also work in Word, the standard for word processing, which Apple doesn't support in the iPad."

    I beg to differ with the author. It's not Apple choosing to not support Word on the iPad, it's Microsoft!!!

  • Report this Comment On October 23, 2012, at 7:06 AM, RandomMeaning wrote:

    There are a lot of little points to discuss but perhaps the greatest one is: congratulations to Microsoft for experimenting with their OS but was grafting a touch based OS designed for small to tiny screens really the best choice for the medium to very large screens on laptops and desktops?

    I would say no. Set aside all discussion of how useful a touch screen OS is in a world of non-touch screen computers, the ergonomic challenges, the annoyance of switching between paradigms when going back and forth between Metro and classic, etcetera.

    Let's ask why. Why is MS making this specific change? Because they want to familiarize the laptop and desktop users with the interface in hopes that they can increase the popularity of their mobile OS while simultaneously moving towards closing the garden to gain greater control over the user base.

    Then you should it ask, is it a good thing for a company to sacrifice the interests of the vast majority of their user base on the assumption they have no where else to go in order to increase profits in their mobile efforts? While simultaneously throwing their hardware partners under the bus? Is that really the company you want to be doing business with?

    Don't get me wrong, there are some very vocal supporters who will simply brush aside any dissension or concerns as lagging behind but the amusing part about that is, I am fairly certain that if Apple had come out with this, they would deride it as dumbing down computing and a greedy money grab.

  • Report this Comment On October 23, 2012, at 9:13 AM, bmohanty wrote:

    "What really separates Microsoft's operating system apart from Apple or Google (Nasdaq: GOOG ) Android is the business functionality it brings to mobile devices. The Surface will come with Office and you can turn the Surface into a computer with a keyboard and mouse, something that Apple can't claim.

    I Disagree with the author.

    Whats included with RT is "Microsoft Office 2013 Home & Student Edition - Preview" (Really!!! Who came up with the name?) and it can ONLY be used by students and non-profit organizations. The licensing DOES NOT allow it to be used, at least legally, by businesses.

    So how is this "business functionality" beneficial to businesses when they can't even use it legally?

    I am so disappointed

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