3 Takeaways From Microsoft’s Recent Earnings

Microsoft (NASDAQ: MSFT  ) is a company trying to transform itself from a software business to one that sells devices and services. Investors have become cautiously optimistic that the company is heading in the right direction, and the stock is up just less than 7% on the year, compared to an increase of less than 3% from the S&P 500 Index. The good news for investors is that there are at least three items in the company's recent earnings that suggest this outperformance will continue.

So crazy, it just might work
There might not have been a less expected product introduction by a company than when Microsoft first introduced the Surface tablet. Investors and analysts thought of the company as a software business, and the Surface seemed to come out of left field.

This bold move was designed to change the way people view Microsoft and usher in the company's device business. Though the Surface business is still relatively small compared to Apple's (NASDAQ: AAPL  ) iPad, the devices seem to be selling well. While Apple reported iPad unit sales fell 16% year over year, Microsoft's Surface revenue increased by 50%.

In addition, Microsoft's consumer devices and hardware division grew revenue by 40% on an annual basis. The first takeaway from Microsoft's earnings is that, due to Surface and Xbox sales, Microsoft is becoming more of a hardware company every day.

While the Surface currently isn't a huge threat to Apple's iPad sales, if its momentum continues, it will be a serious challenger at some point. According to IDC Research, sales of tablets, including 2-in-1s, are expected to increase 19% in 2014. In particular, the company said, "we expect Windows-based devices to capture more than a quarter of the market as its benefits become apparent thanks to growing adoption of 2-in-1s."

In addition, the growth of the Surface and Xbox businesses poses a threat to Google's (NASDAQ: GOOG  ) search dominance. The more Surface and Xbox units that are sold, the greater usage Bing should see. As proof, consider that six months ago, Bing grew revenue by 34%, compared to Google's 31% increase in paid clicks. In the current quarter, Bing's revenue increased 38%, compared to a 26% increase in Google's paid clicks.

As you can see, Microsoft is much more than an old, stodgy software company.

Software as a subscription is working
I was one of Microsoft's skeptics when the company introduced Office 365. The concern was whether consumers would willingly pay $99 a year to use Office when there were other options like Google Docs or Apple Pages that could be used for far less.

The second takeaway from Microsoft's earnings is that consumers will pay for a subscription to Office. Office 365 Home grew its users by 29% in the last three months and now boasts more than 4 million subscriptions. Though Google Docs is free and Apple Pages is either free or relatively cheap, depending on if you buy Apple hardware, neither of these is slowing Office 365 down.

On the commercial side, Office 365 was even more impressive, with a more than 100% reported revenue growth rate. It seems that customers are voting with their wallets, and though free is tempting, sometimes you get what you pay for.

$82 billion may be burning a hole in Microsoft's pocket
The third takeaway from Microsoft's earnings is somewhat speculation, but is based on past history. Microsoft has made significant acquisitions in the last few years designed to develop and improve its ecosystem of offerings. Skype in 2011 and Nokia's handset business in 2014 are two of the more significant investments.

The company plans on using the Nokia handset business to become an even more significant device manufacturer. The integration of Skype into both the Xbox and the Surface tablet has been a selling point for both devices. The company's next move could be more content- or social-based.

The two companies that come to mind immediately are Twitter and Netflix. Both companies have market caps of around $20 billion, so even a price of twice this much would only use half of Microsoft's cash and investments.

An investment in Twitter would give Microsoft a foothold in the social space where Google+ and Facebook reside. On the other hand, a deal for Netflix would give the company a valuable bargaining chip to bundle a Netflix service promotion to help sell more Surface tablets, Xbox consoles, and now Nokia handsets.

The Foolish bottom line
As you can see, Microsoft seems to be managing its transition to a devices and services company well. Investors who have been patiently waiting for the stock to regain its luster may be about to reap the benefits.

Microsoft is ok, but your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 08, 2014, at 9:07 AM, CharlesThe3rd wrote:

    Microsoft took over the SmartPhone world in one year. One year! Microsoft licensing Android was the best idea Microsoft ever had. :) now 55% of Smartphones are powered by Microsoft. Done and Done.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2947609, ~/Articles/ArticleHandler.aspx, 8/28/2015 1:39:03 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Chad Henage

Chad is a self professed tech nerd and has been investing for over 20 years. He follows nearly everything in the technology and consumer goods sectors, and is a huge fan of the Peter Lynch investing style. He has over 1,000 published articles about stocks and investing. You can follow Chad on Twitter at @chadscards1274.

Today's Market

updated 4 hours ago Sponsored by:
DOW 16,654.77 369.26 2.27%
S&P 500 1,987.66 47.15 2.43%
NASD 4,812.71 115.17 2.45%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/27/2015 4:00 PM
AAPL $112.92 Up +3.23 +2.94%
Apple CAPS Rating: ****
GOOG $637.61 Up +8.99 +1.43%
Google (C shares) CAPS Rating: ****
MSFT $43.90 Up +1.19 +2.79%
Microsoft CAPS Rating: ***