How Microsoft Is Proving Its Doubters Wrong

Microsoft has been called an underachiever. Can IBM and Intel prevent it from proving doubters wrong?

Mar 10, 2014 at 10:30AM

Microsoft (NASDAQ:MSFT) is being called an underachiever by some analysts. But, recent share price activity does not make Microsoft look like an underachiever. In fact, Microsoft's cloud-based offerings are performing tremendously well. The company was successful across major hardware products in the last quarter, and the Surface tablet has recovered from its near-disastrous launch in October. Simply put, Microsoft is proving the doubters wrong.

The cloud-based business
Microsoft is excelling in its efforts to break away from the hardware and personal computer sector. Its commercial cloud services division more than doubled its quarterly revenue versus the same quarter last year. The sector's gross margin has clocked in 92% over the past two quarters. Microsoft also recently announced its plan for an initiative that will utilize its cloud-based network to create smarter cities. Clearly, the company has a room to continue increasing revenue in this division. IDC expects that spending in the cloud sector will surge by 25% in 2014.

Microsoft's hardware sector
Microsoft's devices and consumer segment posted strong sales in the last quarter. The Xbox One is a great success for the tech giant. Microsoft sold 7.4 million Xbox units last quarter. Critics might point to the fact that the gross margin of the devices and consumer hardware unit stands at 10% over the past two quarters. But, Gartner says the worldwide video game market might reach $111 billion by 2015, up from $79 billion in 2012. Microsoft is cutting the Xbox One's price in many markets to boost sales, and the console business is clearly a bright spot for the company going forward.

Surface rebound
Microsoft has no plan to give up the tablet battle. In fact, the company seems to be improving. It reported that Surface revenue more than doubled to $893 million, up from $400 million in the first quarter. Though Microsoft is reportedly losing money on the Windows 8 device, the Surface roll-out is about entering a new product space. IDC expects tablet shipments to surpass desktop and portable PC sales this year. The research firm also forecasts that the tablet market will continue to grow through 2017.

Competitors
International Business Machines (NYSE:IBM) is working to get away from the hardware sector. It plans to pump $1.2 billion into expanding its global cloud infrastructure by building 15 new data centers. However, the company's fledgling cloud business couldn't prevent its revenue from falling by 5%. Despite the reverse, IBM has a reason to continue its efforts to break into the cloud sector.  IDC expects a dramatic increase in the number of data centers and predicts that spending on big technologies and services will grow by 30% in 2014.

Intel (NASDAQ:INTC) is also struggling to cut ties with the old technological world. Unfortunately, the company's earnings dropped by 11%. Intel is desperate to execute its transition away from hardware and into cloud-based sectors. The company plans to establish a beachhead in the public cloud through the Intel Cloud Technology program. The initiative will allow customers to reliably compare cloud service providers without getting bogged down in marketing jargon. IDC believes cloud-based platforms will deliver the next generation of competitive advantage apps that could disrupt market leaders in virtually every industry.

Foolish bottom line
Microsoft still maintains the essential characteristics needed to be a winner in the long term. Its cloud-based offerings are showing a growth in sales. The company was successful across major hardware products, as the Surface tablet has rebounded from its near-disastrous launch in October 2013. Microsoft is no underachiever.

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Mark Girland has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel, International Business Machines, 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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