Will Surface Pro 3 Problems Put a Lid on Microsoft Stock?

Wi-Fi connectivity issues emerge as Microsoft positions the Surface Pro 3 as a premium laptop alternative.

Jul 6, 2014 at 9:30AM

Microsoft Surface Pro

The Surface Pro 3 holds promise, if Microsoft can fix the issues plaguing the device. Credit: Microsoft.

Just when Microsoft (NASDAQ:MSFT) looked to gain footing with its new Surface Pro 3 convertible tablet -- the first capable of replacing your laptop, Mr. Softy says -- ZDNet's Ed Bott has confirmed a problem connecting the device to high-speed wireless networks.

From what I can tell, an update to the underlying system software and firmware (i.e., code that lives and executes directly in silicon) introduced new errors to the Surface Pro 3 while fixing others. Click here to read Bott's full report.

For investors, the news comes at a bad time. Microsoft is trying to win premium customers to the Surface Pro 3 after spending most of the past two years pitching from the bargain bin:

Q1 Fiscal 2014
Q2 Fiscal 2014
Q3 Fiscal 2014

Surface Revenue

$400 million

$893 million

$494 million

Surface Cost of Revenue

$645 million

$932 million

$539 million

Device Gross Margin




Sources: SEC filings.

Yet this is also par for the course. Microsoft has spent years selling the Xbox console at a loss to gain a foothold in gaming. Then, last year, Mr. Softy pitched the Xbox One has a higher-priced alternative in hopes of winning more deep-pocketed customers. Too many went on to buy Sony's PS4, forcing Microsoft to cut prices.

Surface Pro 3 could suffer the same fate. Microsoft knows it, too, and is already offering $650 in trade-in value to anyone handing over a MacBook Air. Still, drawing such a direct comparison to Apple's sleek laptop creates risk, especially if the Surface Pro 3 fails to deliver a premium experience. That's why what looks like an otherwise small Wi-Fi bug matters so much.

What to do next? If you're a current or prospective Microsoft investor, hang tight and stay tuned here for more reporting on the error and Surface Pro 3 sales. My guess is we'll see a slowdown in the short term as the bugs get worked out. But I also like the potential -- not only for the Surface Pro 3 but also for similar convertibles as users shift computing tasks to lightweight devices.

Now it's your turn to weigh in. Do you own the new Surface Pro 3? Have you experienced the Wi-Fi issues ZDNet describes? Leave your take in the box below.

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Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Apple at the time of publication. Check out Tim's Web home and portfolio holdings, or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

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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.

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

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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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