1 Big Reason Why Microsoft Isn't a Buy in 2014

The combination of uncertainty around who the new CEO will be and the risk of a divisive board make Microsoft a bad bet this year. Better to look at Cisco recovering.

Jan 8, 2014 at 1:30PM

You have to feel at least a little bit bad for Microsoft (NASDAQ:MSFT) CEO Steve Ballmer. After all, he did take over from a legendary founder in Bill Gates, and then led Microsoft to grow revenue by nearly four times and increase net income almost three-fold, all while reducing the share count by almost 20% and instituting a dividend program which has returned billions more to shareholders:

However, the share price is still down 38% from the price the day Ballmer took the reins. Even after factoring in the dividends paid, you'd still be down 25% if you bought that day. Despite all the positives: The steady dividend and the share buybacks that the company's considerable cash flow and profits pay for, there's little doubt that Ballmer's failures -- like failing to get in on mobile early to name the most obvious and glaring -- all point to the company being better off after he's no longer in charge.

Now that the ball is moving forward to replace Ballmer, shouldn't the timing be right to buy? After all, the share price has dropped about 7% in the past month. Why isn't this the perfect time to invest in Microsoft? In a word: uncertainty. Let's take a closer look at why investors should be wary.

Failed acquisitions; reorganizations before retirement -- just more uncertainty 
For years, Microsoft had been known for its "silos" where internal divisions were segregated from one another, thus limiting potential innovation in a big way. Add in the


The Entertainment division is one of few bright spots for Microsoft. Source: Microsoft

long-standing practice of "stack ranking," where some employees were always classified as underperformers despite their efforts, and the culture within Microsoft was far from ideal. This past July -- a mere six weeks before announcing his retirement -- Ballmer announced a "far-reaching realignment of the company that will enable us to innovate with greater speed, efficiency and capability," as the memo put it. The concern, of course, with Ballmer leaving, will this reorg have a chance to make an impact, or actually cost more in time wasted if a new CEO just shakes things up again? Only time will tell on this one.

Large acquisitions in recent years have also been massive wastes, like aQuantive in 2007 for $7.3 billion, and the $8.5 billion paid for Skype in 2011. So far, neither have come close to matching the nearly $16 billion cost. While older, smaller acquisitions have netted successful products like PowerPoint and Visio , these more recent -- and much larger -- acquisitions are enough to make the September 2013 acquisition of Nokia 's struggling mobile division unsettling at best.  [  ] Even with Steven Elop (a former Microsoft Exec before leaving to run Nokia) returning to Microsoft to run the new mobile unit, there's plenty of reason to doubt that Microsoft can make a successful unit out of what Nokia couldn't do, and in a market segment Microsoft has so far failed at penetrating with any strength.

Who's really going to be in charge? 


A leader like Ford CEO Alan Mulally would do wonders for Microsoft, but would be hard pressed to take the job. Source: Ford

While Ford's Alan Mulally has been rumored as a potential CEO, -- a rumor that he has categorically denied -- and his track record turning Ford around and history in Seattle with Boeing is nice, it's not likely a CEO of his ilk and pedigree would want to deal with having both of his predecessors -- Ballmer and Gates -- sitting on the board of directors. There was reportedly much early strife between Gates and Ballmer when Ballmer took over: with Microsoft facing a serious crossroads as a tech powerhouse and its future direction is still somewhat unclear, any new CEO will need to put their stamp and direction on the company. 

Rest assured that a board featuring both Gates and Ballmer -- not to mention potentially activist shareholders -- would add an additional layer of difficulty for any CEO trying to make Microsoft into the company that it needs to be for the next twenty years, much less a strong leader in the class of Mulally.

Safer money 
Cisco Systems (NASDAQ:CSCO) is another tech name that's taken a bit of a beating lately. The share price tumbled more than 15% in the month following its


Cisco CEO John Chambers. Source: Cisco

November earnings release, based on real concerns when the company announced that sales in the next quarter would fall as much as 10% [  ] . While on the surface it seems crazy to even consider investing in a company telling us sales will be well off, Cisco has several things that play to its advantage:

First, Cisco's core business is providing a means of connecting devices to one another, and providing secure means to do this. With the explosion of mobile computing, and the birth of the "Internet of Everything," where we are seeing everything from the car to the fridge to commercial HVAC units connect to the Web, Cisco's market is only going to continue to grow.

With John Chambers at Cisco since 1991, and CEO since 1995, there's much less certainty around the future direction. Its Board of Directors is stable and also a veritable "who's who" in tech, including the CEO of Salesforce.com , Mark Benioff, and CEO of Motorola Solutions , Greg Brown. Having a stable leadership team and board which is free of the potential strife of activist shareholders or former leaders vying for control, means an easier path forward.

Certainty wins out 
Still immensely profitable and successful, Microsoft is in a period of uncertainty. Until a new CEO is in place, and enough time has passed to learn if his or her plan is moving the company forward -- and whether or not the board is helping or hindering -- Microsoft isn't a safe place to invest. Cisco, while having shown a temporary setback, is in a much more predictable place in tech, with strong leadership and a growing market it can capitalize on. Microsoft could become a great company again. But it's way too early to know when -- or if -- that will happen. Cisco is a better place to invest until then.

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Jason Hall owns shares of Cisco Systems. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

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