Consumers Warming Up to Microsoft

Google (NASDAQ: GOOGL  )  and Apple have brought smartphones and tablets to the front of consumer spending over the last couple of years, leaving Microsoft (NASDAQ: MSFT  ) scrambling to release products years after Google and Apple developed a loyal consumer base for their respective products. Microsoft has struggled to develop a product line on par with the competition. Now, Microsoft is slowly catching up with the following products.

Slow climb for Windows Phone
Windows Phone 7 launched in 2010 and critics praised the unique user interface. However, the lack of popular apps and the inability of Windows Phone 7 to utilize multi-core processors pushed Microsoft to, essentially, kill off Windows Phone 7 in 2012 with the launch of Windows Phone 8.

The release of Windows Phone 8, accompanied by the partnership with Nokia (NYSE: NOK  ) , helped Microsoft restart and catch the attention of consumers and application developers.

Operating System

3Q 2013

Shipment Volumes

3Q 2013
Market Share

3Q 2012

Shipment Volumes

3Q 2012

Market Share

Change in shipment volume (YOY)

Windows Phone

9.5

3.6%

3.7

2%

156%

Android

211.6

81%

139.9

74.9%

51.3%

iOS

33.8

12.9%

26.9

14.4%

25.6%

Others

1.7

0.6%

8.4

4.5%

(80.1%)

Source: IDC Worldwide Mobile Phone Tracker

In Q3 of 2013, Windows Phone 8 increased the number of units shipped from 3.7 million to 9.5 million, a 156% growth rate. Granted, 9.5 million units shipped is peanuts compared to the 33.8 million units that Apple shipped, or the 211.6 million that Google shipped, but positive growth is still positive growth.

Partnering with Nokia has proven to be lucrative for Microsoft. The Nokia Lumia product line accounted for 93% of Windows Phone 8 sales in Q3 2013. This led Microsoft to offer Nokia $7.2 billion to purchase the company's ailing cell phone division -- handing Microsoft more control of the Windows Phone 8 image and hardware. On Nov. 19, 2013, Nokia shareholders voted and approved the sale to Microsoft, which is expected to be complete in early 2014.

Continued fight for the living room
Sony (NYSE: SNE  ) launched the PlayStation 4 on Nov. 15, 2013 in North America, and Microsoft quickly followed suit with the Xbox One launch on Nov. 22, 2013. The PlayStation 4 and Xbox One have both sold more than 1 million units within the first 24 hours of their respective launches.

Despite both consoles selling around 1 million units, video game retailer GameStop announced that it has 2.3 million customers on a waiting list for these next-generation consoles. Electronic Arts COO, Peter Moore, expects that between Sony and Microsoft, both consoles could have a combined total of 10 million units sold by the end of March 2014.

Extrapolating further, Wedbush Securities analyst, Michael Pachter, forecasts lifetime sales of the Xbox One to be around 90 million-100 million units and slightly higher for the PlayStation 4 at 100 million-110 million units. Both forecast are higher than what the current generation consoles have sold since 2005, which VGChartz estimates at 79 million and 80 million units, respectively.

Evolution of Office
Microsoft Office is a software staple used by everyone from elementary students to corporate executives. Microsoft's Office suite was the standard for many years, but Google has slowly been eating away at Microsoft's grip on word documents and spreadsheets. Office accounts for around 90% of the revenue for Microsoft's business division, or approximately 29% of Microsoft's overall revenue in fiscal 2013. Keeping Office relevant in enterprise environments will be key for maintaining revenue growth in the future.

In a webinar from research firm Gartner, titled "Choosing a Cloud-Based Office System: Google vs. Microsoft," the report had some interesting insights. Channel Partner writer Kurt Mackie summarized the future of the productivity suite market going forward:

  • By 2013, there will be 630 million Office suite business users, with 50 million of them using a cloud-based product. By 2022, there will be 1.2 billion Office suite business users, with 696 million of them tapping the cloud.
  • Microsoft Office controls the market with about 80%-96% user share.

Google Docs, renamed Google Drive in 2010, has provided major competition for Microsoft. According to a CNNMoney article, more than 120 million users have downloaded Google Drive, and around 5 million users, namely enterprises, pay a monthly fee to utilize Google apps.

While the document and spreadsheet software on Google Drive is not as comprehensive as Office, there is one allure Google has -- Google Drive is free. Another product that Google offers for free is Android, which launched in 2008. Within three years, Android had over 50% of the smartphone market share, and currently controls more than 80% of the market.

Addressing the growth of Google Drive, Microsoft tweaked its Business Productivity Suite to a new product called Office 365. Aimed primarily at small businesses and enterprise environments, Office 365 added abilities such as hosted email, social networking and collaboration, and seamless integration with cloud storage. The additional features received praise from critics, and the annual subscription model will help increase revenue for the business division.

Google is nipping at the heels of Microsoft Office. The question is, will Microsoft keep Office relevant for future consumers? The seamless integration of the cloud into Office 365 is certainly a step in the right direction.

Financial review
While having solid products is only part of the equation, having a solid financial base is also important. The chart below contains data on the revenue, earnings per share, and dividend payout from 2009 through 2013.

Year Ended June 30

2013

2012

2011

2010

2009

Revenue
(in millions)

77,849

73,723

69,943

62,943

58,437

Diluted EPS

$2.58

$2.00

$2.69

$2.10

$1.62

Cash dividends declared per share

$0.92

$0.80

$0.64

$0.52

$0.52

Source: Microsoft's 10-K

Microsoft's EPS piqued in 2011, fell in 2012, but recovered in 2013. Over the last five years, revenue has consistently climbed and the 77% increase in dividends is a solid bonus for investors looking for cash flow growth.

Worth your investment?
Even though Microsoft is in a constant game of product catch-up, the company remains stable, and a new CEO at the helm could help Microsoft reinvent its public appearance (similar to what Marissa Mayer has done for Yahoo!). Through consistent revenue growth and improving product lines, Microsoft probably won't turn any heads, but it is a solid Blue Chip worthy of a spot on your watch list or in your portfolio. 

Other opportunities 
Microsoft gained 36%, year-to-date, and the entire market had huge gains across 2013, leaving investors on the sidelines burned. However, opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!


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