Don't Count Microsoft Out Yet

By the way the market has reacted after the Windows 8 launch, you may think Microsoft (NASDAQ: MSFT  ) is dying. The company's shares have vastly underperformed the S&P 500 (SNPINDEX: ^GSPC  ) since the launch and early sales numbers haven't helped the cause.

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But the loss of confidence in Windows -- and by extension, Microsoft -- is a quick reaction to a long play from Microsoft. I think it's far too early to count Microsoft out.

Windows 8 adoption will take time
When you change your operating system the way Microsoft did with Windows 8, it will take time for customers to get accustomed to it. As popular as it was, even Apple's (NASDAQ: AAPL  ) iPhone took years to become a ubiquitous consumer product. Now, iOS is a known commodity for most smartphone users so there's little hesitation about buying an iPhone or iPad.

Let's at least give Microsoft enough time to get people comfortable with Windows 8 before writing it off altogether. Investors were freaking out over an NDP report that PC sales were down 21% in a four-week period ending Nov. 17, but for five of those days, Windows 8 wasn't out. Adoption may also be slower because of the transformation of the operating system.

The point is, we won't know if Windows 8 is a success for months. We can't judge the first three weeks of sales and call it a flop, especially when we haven't begun to see the OS in the mobile arena yet.

Smartphones and tablets are in their infancy
The initial lack of success for the Microsoft Surface also has many analysts and investors writing off Microsoft's tablet business far too quickly. Yes, Microsoft priced the device too high if it really wants to take a bite out of Apple's dominance in the business, but this is the company's first solid stab at a tablet.

Most reviews of the Surface are generally positive (including my own) and although I won't be trading in my iPad for a Surface any time soon, I can see a time when I might. For Microsoft, that's progress.

The big driver of sales in the future will be the familiarity millions of Windows 8 users gain from using a similar interface on desktops. As users grow accustomed to the colorful squares, I think Microsoft's mobile offerings will become more compelling. Microsoft also needs to build a critical mass in the app store, which is a chicken-and-egg situation until smartphone and tablet volumes pick up. But Apple and Google (NASDAQ: GOOGL  ) have shown that apps will be added at light speed once developers decide there's enough devices to make it worthwhile. 

Some have noted the absence of big-name apps like Facebook (NASDAQ: FB  ) , Pandora (NYSE: P  ) , Yelp (NYSE: YELP  ) , and Amazon (NASDAQ: AMZN  ) is a red flag for Microsoft. Before we freak out about the absence of these apps, we need to remember that the developers' kit only went out in September, and it takes some time to write apps. In the case of Facebook, let's not forget that it took Facebook nearly two years to launch a native iPad app.

In some ways, Microsoft can thank Apple for an opening in mobile devices. Apple has made the iCloud and iTunes incredibly easy if you own all Apple devices, but it's still a somewhat walled off system to PC users. Most of the world still uses PCs so, just as the iCloud and other services from Apple keeps users in its sphere of influence, so will features like the SkyDrive and Microsoft app store.

The slow launch of the Surface and Windows 8 smartphones is disappointing, but let's also remember that this is pure upside for Microsoft. Its share in both markets is almost non-existent.

The value is far too compelling
If the PC isn't dead and the tablet and smartphone businesses are pure upside, the stock is a bargain at 8.3 times forward earnings and a 3.5% dividend yield. The same can be said about Wintel's other half, Intel (NASDAQ: INTC  ) , which trades with a 10.4 forward P/E and a 4.5% dividend yield.

For an even more in-depth look, read our brand-new premium report on Microsoft,  in which our analyst explains the huge opportunity for the company and covers the challenges that lie ahead. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.


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  • Report this Comment On December 08, 2012, at 10:14 PM, RandomMeaning wrote:

    Microsoft's problems with Windows 8 and Surface has nothing to do with time for acceptance. The problem is that they are weak products for which there are better alternatives for lower prices.

    Windows 8 will be a "success" by virtue of it being the default for every Windows computer going forward. Microsoft is not going to die as a company, although their revenue and profits will decline. That should be obvious since they are charging less for Windows 8 and hardware always has lower margins, not to mention the cost of maintaining those redundant Microsoft stores - as if almost everything in there couldn't be found all over the place already.

    Surface though, they're going to have to drop prices a lot before those start moving. But rejoice, there are plans to offer them through more channels which will allow happy Microsoft execs to make bold announcements about millions sold . . . into the channel at least. Not so much to actual people. Unfortunately, Microsoft's leadership is much more interested in appearances these days than in actual effort.

  • Report this Comment On December 09, 2012, at 12:04 AM, NOTvuffett wrote:

    I just built a new desktop pc a couple weeks ago and I installed Win 7 for the OS. Why didn't I go with Win 8? Touch is stupid on a desktop. And why should I have to learn new ways to do the same old things for little more than a different UI aesthetic?

    Surface is the only tablet that has looked remotely interesting to me, because of the keyboard and ability to run common business apps. Maybe one of the others would appeal to me if I had to ride a bus or train to work (read, watch a video, shoot off a one or two sentence email, etc.).

    Leave it to the MS boys to eff things up. The "standard" apps available for the original Surface with the low powered processor will not have compatible .exe files with the version of Win 8 for the more powerful processor. There are ways they could design around this, but not without a significant performance hit. If they piss me off enough, I guess I'll go do Linux, lol.

  • Report this Comment On December 09, 2012, at 9:38 AM, Justice007 wrote:

    @NOTvuffett

    I suppose you need a different talking point. I have windows 8 on my non-touch laptop and it works beautifully. It took me less than 20 minutes to figure out everything I need to know about windows 8. I am every bit as fluent with it as I was with windows 7. Think for yourself and stop trumpeting what others say. The mouse works the same way in windows 8. Why don't you help us out by stating some of what you cannot do with windows 8 using a mouse. I will be waiting. I believe others will like to hear as well.

    By the way, how powerful is the processor in something like the iPad?

  • Report this Comment On December 11, 2012, at 10:11 PM, NOTvuffett wrote:

    @Justice007,

    My main point is that I just couldn't think of a good reason to change at this point.

    You are preaching to the choir. The MS OS is more capable than the Apple OS has ever been. I really don't get it, why Apple fanboys are ready to shell out boutique prices for inferior hardware and software.

    I have known the Apple computers since they used the Motorola 6502. I thought the Motorola 68000 had much potential, a much more rational architecture than the 16 bit Intel processors of the time. However, when the Mac came out and there was no available compiler for it, that was the kiss of death for me. I was like, 'what is the effing point of having a computer if you can't program it?'. If we are to judge Apple by it's original mission- to build computers- it has been an abject failure. Its market penetration has always been low on this front. If we gauge by other metrics, it has been wildly successful.

    It has given me great consternation that people show up with a new Apple phone and then they think it is their job for the next few days to ask their phone questions and then laugh at the answers that it gives. I don't think it was SIRI, but a salesman for my company showed up one day with a new Apple phone which had a voice recognition search feature on it. After he laughed at the non-answers and distracted the workers that do my stuff for what I considered an unacceptable period, I told him to search for the most effed-up thing I could think of. "gay midget porn". wouldn't you know it? It immediately brought up multiple video links to that depraved content. Then they watched it and laughed. I didn't have the heart to tell them that I steered them into watching gay midget porn, lol.

    How powerful is the processor in the iPad. Not very, lol.

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