Are Microsoft Corporation's Surface Sales About to Fall Off a Cliff?

Sales for Microsoft's Surface tablets more than doubled last quarter, but the real test lies ahead.

Mar 22, 2014 at 12:30PM


Microsoft's Surface 2 Pro tablet. Source: Microsoft.

Almost two months ago, shares of Microsoft Corporation (NASDAQ:MSFT) surged after the tech titan reported better-than-expected fiscal second-quarter results.

CFO Amy Hood elaborated on its performance, saying "We delivered record revenue as demand for our business offerings remains high and we made strong progress in our Devices and Consumer segment." 

Now-retired CEO Steve Ballmer echoed that sentiment, also pointing to a "great holiday quarter" for its consumer segment.

Sure enough, even as Windows OEM revenue declined 3% on soft consumer PC sales, revenue from Microsoft's devices and consumer segment jumped 13% to $11.91 billion. To explain that strength, the company can thank 7.4 million Xbox consoles sold during the quarter, 34% growth in advertising revenue from Bing, and -- perhaps most surprising -- Surface tablet revenue, which more than doubled over the previous quarter, from $400 million to $893 million. 

Surface sales aren't what they seem
That last statistic seems especially impressive, right? What more could Microsoft investors ask than having sales of their promising tablets more than double over the course of just three months?

Well, I suppose they could ask Microsoft to actually make money on those sales.

Don't get me wrong; that was a big bump by any measure and definitely a step in the right direction. But Microsoft's respective Form 10-Q also lists Surface cost of revenue last quarter as $932 million, which means it lost around $39 million from the tablets despite their growth.

Then again, much of that had to do with the fact that -- thanks to a temporarily low $199 price tag -- Microsoft's first-gen 32GB Surface RT ended up being Best Buy's top-selling item on Black Friday. But is moving bunches of merchandise at rock-bottom prices all that encouraging?

Remember, Apple (NASDAQ:AAPL) sold more than 26 million iPads last quarter for $11.468 billion. And while that was only a 7% year-over-year increase in iPad revenue for Apple over the same period last year, it also marked an 85% sequential gain from the previous quarter.

What's more, Samsung (NASDAQOTH:SSNLF) simultaneously reported a two-fold year-over-year surge in tablet sales, thanks to the end-of-Q3 launch of its Galaxy Tab 3 and Galaxy Note devices.

Suddenly, Microsoft's own Surface holiday bump doesn't look all that great.

What now?
This also raises the question: With the holiday quarter complete, will consumers still want to buy Microsoft's Surface tablets without the steep discounts?

Maybe, but I wouldn't hold my breath.

To its credit, at least some of Microsoft's tablet strength last quarter can be chalked up to the Oct. 22, 2013, launch of its Surface 2 and Surface 2 Pro devices. And though we've seen sporadic reports of Surface 2 supply shortages over the last two months, it's still unclear whether that's a result of actual consumer interest or Microsoft just carefully managing inventory.

I wouldn't blame it if the latter turned out to be the case. Last summer, Microsoft had to take a $900 million inventory writedown thanks to -- you guessed it -- those Surface RT tablets, which finally sold well in its most recent quarter. 

Unfortunately, Microsoft hasn't provided any clarity by breaking down its Surface sales numbers, so we can't tell just how many of higher-margin Surface 2 tablets it's actually selling.

In the end, though, combine that with the fact Microsoft only now appears ready to launch Office for Apple's iPads later this month, and I can't help but wonder whether we're seeing the latest signs of desperation as Microsoft's own tablets continue failing to grab any meaningful market share.

Speaking of huge potential...
Let's face it: Every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Steve Symington owns shares of Apple. The Motley Fool recommends and owns shares of Apple. It also 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information