What's Wrong With Microsoft Corporation Today?

On Wednesday, Microsoft surged as the Surface tablet brand got a much-needed focus adjustment. But both the stock and the tablet strategy took a big step back today.

May 22, 2014 at 2:00PM
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Just yesterday, Microsoft (NASDAQ:MSFT) was one of the Dow Jones Industrial Average's (DJINDICES:^DJI) best performers. One session later, Microsoft shares trade down by 0.6% while the Dow overall headed slightly upward. Redmond among the Dow's worst performers in midafternoon trading Thursday.

This crazy market is always ready to turn on a dime.

What's wrong with Microsoft today?
To understand Microsoft's downside on Thursday, you have to begin by looking at Wednesday's surge.

That 1.7% climb rested on a handful of incremental updates to the Xbox One video game console, as well as on the strategically sound announcement of the Surface Pro 3 laptop-replacement tablet. A crucial value driver embedded in the Surface announcement was the absence of another tablet announcement. With the Surface Pro series, Microsoft is aiming at the corporate markets than have been Redmond's bread and butter since, oh, roughly forever. A smaller and less business-minded Surface version would simply pander to consumers, and set itself up to lose head-to-head comparisons against the Apple (NASDAQ:AAPL) iPad Mini.

Surface
The Surface Pro 3 might soon get an unwelcome addition to the family. Let's hope not. Image source: Microsoft.

But just because Microsoft didn't introduce a smaller Surface tablet on Tuesday or Wednesday doesn't mean it won't do so later on. Bloomberg said that mobile devices Vice President Stephen Elop (yes, that guy) stepped in to kill the Surface Mini with his own bare hands, since it just wasn't different enough from competing tablet computers. Maybe he should have strangled it a little bit harder; according to technology news site Neowin, which has been right about surprising Microsoft Surface developments before, the Surface Mini has just been delayed a little bit.

Neowin's sources say the smaller tablet will see the light of day this fall, when Microsoft is ready to pair it with a version of its Office suite that is specially designed for Windows-based touch screen devices.

Sounds like a reasonable strategy on the surface, but then we're back to battling firmly entrenched enemies on their own home turf.

I would argue that Microsoft is better off refocusing its mobile strategy on the corporate market. Back off of consumer-facing store shelves altogether and double down on enterprise and small business accounts. Become the business-class mobile leader of the next generation with a laser-like concentration. If you can't be all things to all customers, pick the one market that actually wants you to succeed, and do everything in your power to win there.

What to look for in September
Today's market action shows that I'm not the only Microsoft watcher who thinks this way. New CEO Satya Nadella has demonstrated an unheard-of willingness to adjust to changing market conditions, and maybe he'll do it again in the tablet sector. If the tablet-friendly Office suite shows up this fall without dragging a Surface Mini into the world, it'll be another feather in his long-term strategy cap.

But if that announcement also introduces a smaller Surface, doomed to struggle in a hostile consumer market against the iPad and a plethora of popular Android models, it'll be the biggest mulligan of Nadella's young CEO career. A few unsold tablets won't capsize Microsoft's stellar balance sheet, but this kind of blunder would be a big hit to the company's reputation.

Yet another small-screen tablet wouldn't be another groundbreaking innovation along the lines of Xbox Kinect. It's more like another Zune, or Clippy, or Windows Vista. Going there can only undermine Microsoft's credibility in the consumer market, which is a problem with long-term ramifications.

Everybody makes mistakes, but let's hope that Nadella doesn't commit this particular error. Hold your horses until they're really ready to run -- and a smaller Surface tablet just doesn't have that racehorse pedigree at this point.

Leaked: Apple's next smart device (warning, it may shock you)
Microsoft actually sold a smart watch way back in 2004, but the market just wasn't ready for it. Or perhaps Microsoft didn't have quite the right idea yet. Today, smart watches are ready to take the next big step. Apple recent recruited a secret-development Dream Team to guarantee their newest smart device was kept hidden from the public for as long as possible. But the secret is out... and some early viewers are even claiming its everyday impact could trump the iPod, iPhone, AND the iPad. In fact, ABI Research predicts 485 million of these type of devices will be sold per year. But one small company makes this gadget possible. And their stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple 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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