This Was Microsoft’s Biggest Mistake of the Last 10 Years

Microsoft's prior management made some big mistakes that new management appears to be fixing.

Jul 20, 2014 at 11:30AM

Microsoft (NASDAQ:MSFT), like many of the "old tech" names lately, has gotten a lot of love during the last year. Multiple expansion, coupled with healthy profit growth, have propelled Microsoft to levels not seen since the tech bubble. Best of all, Microsoft still isn't all that expensive, trading at just 16.78 times trailing 12-month earnings. And it's even cheaper if you net out its gigantic cash position.

However, Microsoft made a huge mistake that cost its shareholders dearly during the last decade, one that new CEO Satya Nadella is taking bold action to correct.

What's Microsoft really good at?
Ask yourself -- what's Microsoft's core competency? (Hint: it's in the name --- Microsoft.)

Software. Microsoft's core competency has traditionally been -- and will likely continue to be for decades to come -- the development of fast, well-designed software, as well as the tools that go into the development of software -- which, OK, is software, too. For example, whether one likes or loathes the interface of Windows Phone, it's hard to ignore the fact that the platform is very smooth and efficient under the hood. 

Unfortunately for Microsoft, Apple (NASDAQ:AAPL) envy clouded the company's judgment.

Apple envy drives Microsoft to do strange things
If you look at Apple's financial statements, you'll see that there's plenty to be envious about -- this is the world's most-profitable technology company, and not by a small amount, either. This vast profitability has been the product of -- frankly -- a revolutionary set of products (iPhone, iPad), an unmatched retail presence, a beautiful subsidy model for high-cost smartphones and, of course, fantastic products. Microsoft's big mistake was in trying to -- pardon the phrasing -- ape Apple.

The Surface flop
For the longest time, Microsoft has tried to double down again and again on developing and marketing its own hardware, instead of doing what it does best. The Microsoft Surface RT -- intended to go head-to-head against the iPad -- was such an abject failure, that the company ultimately ended up dumping them for dirt cheap.

Not only did Microsoft make a product that nobody wanted -- Windows RT couldn't run any traditional Windows applications -- but imagine how Microsoft's longtime OEM partners felt. These companies, already living on shoestring margins as Microsoft and Intel capture the majority of the value in PCs, now had to worry about getting completely cut out!

The Nokia hookup wasn't much better
Microsoft's purchase of Nokia's handset business wasn't much better. Nokia, which was at one point the "Samsung" of the feature-phone world, was in rough shape after the smartphone revolution left its handset business in shambles.

After initially partnering with Intel to deploy MeeGo-based smartphones, Nokia left the chip giant to work with Microsoft in trying to get its Windows Phone more broadly deployed. Surprising to few, the Nokia-designed Windows Phones largely flopped. A few years later, Microsoft outright bought Nokia's handset division in a bid to become even more like Apple.

This purchase may have made sense to anybody who believed Microsoft's financial projections, which were given following this acquisition. However, the reality of the situation is that the low-end and mid-range of the smartphone market is a profitability nightmare, and even Samsung -- one of the few companies in this space that's actually making money -- is beginning to see significant margin/competitive pressures. CEO Satya Nadella sees this madness for what it is, and appears to be putting a stop to it.

Satya Nadella – Microsoft's savior?
It's no secret that Satya Nadella, Microsoft's new CEO, was against the Nokia handset business purchase. He's cutting much of the fat that came with the Nokia purchase, is bringing Microsoft's software and services, like Office, to successful mobile platforms -- i.e. iOS -- and may finally make the next Windows palatable to traditional PC users.

With Microsoft's relatively cheap valuation, and with costs cut in areas that aren't essential to the core business and strengths of the company, Satya Nadella appears to be taking a different path to delivering shareholder value. Bringing to market the world's best software and services, regardless of platform, will be Nadella's legacy, for better or worse. 

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its 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!

Ashraf Eassa owns shares of Intel. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Intel. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), Intel, 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.

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.

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