Will Microsoft Ever Be Cheap Enough?

Forget what you've heard about Microsoft (Nasdaq: MSFT  ) being cheap.

By the numbers, there's no doubt it is. But you'll never see outsized returns owning this stock so long as the current management team is in charge. Major shifts are required. Mr. Softy needs to either:

  1. Replace CEO Steve Ballmer with a tech visionary.
  2. Hire a tech visionary as president and give that person the authority to challenge Ballmer in front of employees.
  3. Hire a tech visionary and strong operating chief to ensure that quality standards and delivery schedules are met while Ballmer focuses on sales.

Um, didn't you just say buy Microsoft?
Yes, I did. You can read the story right here. At the time, I was impressed by Mr. Softy's line-up of products and efforts to diversify. Ballmer was measured and intelligent on stage. He spoke authoritatively about a plan to use ARM Holdings chip designs to expand Windows' footprint. And he oozed confidence (rightly) in talking up successes with Windows Phone 7 and Kinect.

Two things have changed since then. First, over the weekend Microsoft PR tried a stunt in which it tied retweets from its @bing Twitter account to the size of a proposed donation to relief agencies dealing with the fallout of tragic events in Japan. Mr. Softy has since backed off this stupid marketing effort, but the very idea shows not just callousness but also a woeful lack of strategic thinking.

Second and more importantly, a new report says that it'll be at least 2012 before Microsoft will have a tablet OS to compete with Apple's (Nasdaq: AAPL  ) iOS and Google's (Nasdaq: GOOG  ) Honeycomb edition of Android.

"If 2011 is the year of the tablet wars, Microsoft will be awfully late suiting up for that battle. It's not a good position to be in," Gartner analyst Michael Gartenberg told Bloomberg, which first reported the news.

Forget for a moment that Mr. Softy has given its two most dangerous competitors a massive head start. What's most embarrassing about this is that we know there's interest in Windows tabs. At CES, Chinese industrial products maker and Buffett-favorite BYD showed of a large-screen tab powered by Windows 7.

It was a hack job and therefore inoperable, but the point remains. Interest is interest, and Microsoft's two key PC partners -- Dell (Nasdaq: DELL  ) and Hewlett-Packard (NYSE: HPQ  ) -- have turned elsewhere for help launching their own tablets. Dell to Google, and HP to Palm.

Actually, it's worse than that. HP isn't just foregoing a Windows tablet. The nation's top PC maker now says it will include a copy of Palm's WebOS with every desktop and laptop machine it ships next year. Users will get to compare HP's and Microsoft's offerings, side by side, and decide which is best.

Strategy, or strategery?
Combined, these missteps tell me there's no central strategy for moving Microsoft forward. You might argue the same about Google given its own execution issues. I'd counter that The Big G has built cheap experimentation into its culture and that new CEO Larry Page knows exactly who his customers are: advertisers and developers.

Microsoft, on the other hand, can't seem to figure out which group it most wants to sell to. Are businesses more important? Consumers? Who's the ideal customer for Microsoft products? The answer varies by industry, I'm afraid. And that's not OK. Either Microsoft needs to get Ballmer help with figuring this out, or he has to be replaced by a team that has both vision and verve.

Microsoft lost vision when it lost Ray Ozzie. It lost verve when Bill Gates decided the world was more important than the company he co-founded. Judging by a long history of missteps (Beta News writer Joe Wilcox does a good job recounting them here), Ballmer alone simply isn't enough to fill the void.

Do you agree? Disagree? Let us know what you think about Microsoft's strategy, Ballmer's performance, and whether a Windows tab will gain enough share to matter when it's finally released to market using the comments box below.

You can also rate Microsoft in Motley Fool CAPS and keep tabs on the company by adding the stock to the My Watchlist tool, our free, personalized stock tracking service.

Google and Microsoft are Motley Fool Inside Value picks. Google is also a Motley Fool Rule Breakers recommendation. Apple is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended members open a bull call spread position in Apple and a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He owned shares of Google and Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. 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 owns shares of Apple, Google, and Microsoft and has written Apple puts. The Fool is also on Twitter as @TheMotleyFool. Its disclosure policy likes daylight savings time but hates losing the hour of sleep.


Read/Post Comments (9) | Recommend This Article (6)

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 March 14, 2011, at 5:32 PM, jimmy4040 wrote:

    Now you've done it! I've had MSFT people on my back for 6-7 years chanting "intrinsic value", as they lose money year after year. I'll pass your address on to them now!

  • Report this Comment On March 14, 2011, at 5:56 PM, Gr0w wrote:

    This article (in two parts) appeared on Fool-UK more than twelve years ago:

    http://www.fool.co.uk/bribble/1998/bribble981202.htm

    http://www.fool.co.uk/bribble/1998/bribble981209.htm

    It is not that I want to say "I told you so" ... but perhaps some of the issues raised in it were indicative of aspects of the DNA of the company.

    :-)

    Grow

  • Report this Comment On March 14, 2011, at 8:51 PM, baldheadeddork wrote:

    Congratulations, Tim. I thought you hit your peak last fall when you strongly recommended BYD over Ford. But this is even worse. Well done, sorta.

    It's become a cottage industry for every hack Faith Popcorn wannabe to latch on to the newest tech gizmo and declares it The Reason Microsoft Is Doomed. Tablets are just the most recent. But the combined effects of two decades of this crackerjack forecasting is...nothing. Microsoft still has 90% of the desktop OS market, 95% of productivity suites, and over half of the server OS business - and PC's still outsell alternate devices by massive margins.

    I hate to interrupt your theories with some research, but...Steve Jobs crowed during the launch of the iPad2 that Apple has sold 100 million iPhones and 15 million iPads. Sounds like duh, winning. Until you discover that 315 million PC's were sold just last year, and 90% of those shipped with Windows. How bad is Microsoft failing because they're not in the tablet market? If they matched Apple in tablet sales their desktop OS sales would rise less than 10%.

    Yeah, that's worth blowing up a $65 billion company.

    Why isn't Microsoft's share price growing? Partly because it was overpriced for a big chunk of the last decade relative to its industry and the S&P. But it's also because, to put it bluntly, most analysts are as dumb as you are in this piece, Tim. They don't consider the financial performance. Microsoft is more profitable, has stronger return on investment and its free cash flow is 50% greater. And their brains can't accept both Apple and Microsoft doing well. One has to be the bestest company ever and the other has to be on the verge of collapse.

    As much as it pains me, Microsoft won't take off until Apple stumbles. The good news for MSFT owners is that Apple will. No company is perfect forever, and when Apple falls I'm sure you'll be there to tell us how they have to fire Jobs and get some innovators in there.

  • Report this Comment On March 14, 2011, at 9:32 PM, TMFMileHigh wrote:

    @baldheadeddork,

    Typically I enjoy your comments but this is a truly awful strawman.

    Microsoft is underperfoming because ... analysts are dumb? I'd never figured you for an apologist. You're better than that.

    >>Until you discover that 315 million PC's were sold just last year, and 90% of those shipped with Windows. How bad is Microsoft failing because they're not in the tablet market? If they matched Apple in tablet sales their desktop OS sales would rise less than 10%.

    And your point is? You're an investor, you know that long-term returns are dictated by long-term performance and that long-term performance is determined by sound strategy. Microsoft has managed to alienate its top distributor of PCs even as it has ignored the tablet market.

    As much it pains me, numbers-obsessed ostriches will never admit there's room for both Microsoft and Apple in the post-PC world, but only if Microsoft takes the necessary steps to get there.

    The bad news is that it won't happen, and when Azure comes up short and Windows finally begins to show its age I'm sure you'll be back to tell us how no one, especially Ballmer, could have foreseen how usage patterns would shift from the OS and the desktop to the cloud and the take-anywhere computing device.

    In sum: while I appreciate your attempts to keep me honest -- good criticism is important and your warnings about BYD have proven right -- I think you missed the mark this time.

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On March 14, 2011, at 9:59 PM, jimmy4040 wrote:

    bald:

    Short and sweet, yes when Ballmer is gone, MSFT should do better. However you'll never make up the money you have lost over any period in the last decade from one week to ten years, you name it.

    You're obessed with Apple, but I'm not. Short of investing in GM, C, or BAC, something like that, you'd have done better throwing a dart at a board, or just picking a Rule Breaker or Stock Advisor pick at random.

    You won't even beat us non-MSFT people in the future, because some of us buy long term options every time rumors start that Ballmer is leaving.

    Sorry reality bites

  • Report this Comment On March 14, 2011, at 11:45 PM, baldheadeddork wrote:

    @Tim - Thank you for the gentlemanly reply. I'll try to keep up with you on that.

    I definitely didn't mean to come off as an apologist. But the reality of Microsoft simply doesn't square with the perception you paint in this article.

    People talk about Apple's cash flow, margins and profits. Microsoft's is better, and it has been for all of the last year when AAPL went on a 50% run.

    Fifteen million tablets in a year is a seismic event and Microsoft's late entry is reason to fire the entire executive team. But last year MS sold nearly 20 installations of Windows 7 just in the OEM market for every iPad sold.

    The point was hype versus reality. If Microsoft matched Apple in tablet sales, it would have only a slight effect on their consumer OS sales. If you want to put it in dollars, falling so far behind Apple in tablets has cost them a billion in revenues if you presume that they could get $70 for a tablet OS license. For a $65 billion company, that's a micro-niche market and it would be a ridiculous reason to throw out the entire leadership of the company.

    >>when Azure comes up short and Windows finally begins to show its age I'm sure you'll be back to tell us how no one, especially Ballmer, could have foreseen how usage patterns would shift from the OS and the desktop to the cloud and the take-anywhere computing device.

    Don't hold your breath. This @&$! is my day job (I don't work for MS) and nowhere is the gulf between myth and reality greater than what investment pundits think about cloud computing.

    Cloud computing will have little impact on MSFT's three moat products. Businesses will continue to use MS Office and Microsoft will collect their licensing regardless if the apps are locally installed or on a remote server. Virtualizing the desktop OS is hugely cost prohibitive - and Microsoft would collect a per station license even if they did. Their server OS software is the backbone for most small business networks. If you have a Windows domain you're going to keep it because changing is a massive (and expensive) pain. If your copy of MS Server is on an ancient box in your closet or a remotely hosted new blade server, MS still gets paid.

    Do you know what Azure is? It's not a competitor to Salesforce or VMWare. Azure is a layer above that. It's aiming at IBM's lock on the hosted services market. MS is bringing the virtualization software created for Azure into Server as an option, but that business is literally like the browser wars. VMWare gives their Server program away for these small networks.

    And about Windows getting old, Win8 is on target for release next summer. If you're going to use a stereotype, can you at least grab one with a little less rust on it?

    One thing in your reply sticks out, where you said "You're an investor." Yeah, and that's the whole point.

    When the reality of a company or industry doesn't click with what most people think it is, that's a hell of an opportunity to make a lot of money.

    At some point (sooner than later, I think) Apple will stumble. When investors allow how they think of Apple to change, they'll take a second look at the preconceptions they've had about other tech companies. If investors and consumers can turn 180 on Ford and GM after Toyota stumbled, you can bet your ass they can make Microsoft cool when Apple trips up.

  • Report this Comment On March 15, 2011, at 12:13 AM, baldheadeddork wrote:

    @jimmy - How did getting a visionary CEO work for HP when they hired Fiorina? What's it done for Dell? Is there any example of a visionary CEO (or an entire executive team, as Tim would proscribe), shaking up a company of this size and making it better? Maybe my memory is faulty, but when a company does that I think the most common outcome is New Coke or the McDLT.

    (I also really like Tim's concept that there are hoards of available visionary leaders to fill all these positions in MSFT, and that they wouldn't be ruled by their egos while challenging each other. That never happens, right?)

    I'm also stumped for what you guys expect from Microsoft? This company has higher RoA, RoE, profit and operating margins than Google, for the love of God. Does Ballmer have to deliver 50% operating margins before you'll admit he might know what he's doing?

    I'm no more obsessed with Apple than I was with Toyota and Ford last year, or the financial sector in 2007. There is a big disconnect between what everyone knows is true about Apple, and what is really happening.

    Last, FWIW, I didn't buy MSFT until April 2009, and I'm up 25% since then, plus dividends. I didn't buy until I was able to test Win7 in the public beta program. I didn't own it earlier in the decade because I thought it was overpriced even after the dotcom bubble popped, and when the valuation came down they had Vista, which was a dog.

    Good luck on your options, they're too close to day trading for my tastes. Right now MSFT is valued under the average for the S&P, and it pays a higher dividend. That's been a good barometer for growth in the past, so I'll hold.

  • Report this Comment On March 15, 2011, at 10:52 AM, jimmy4040 wrote:

    bald:

    You'll excuse my skepticism in your claim that you bought MSFT at almost the absolute low point over the past ten years I hope. (forgive me if is in fact true, I would tell you what I bought Sirius for, but you would not believe me either!)

    Still, even if you had bought an S&P index fund you would have done better over the same time frame.

    I don't actually hold any current options on MSFT I bought them last year when the rumors were floating. They expired worthless, but of course I made more money on the stocks I did buy in place of MSFT.

    I don't consider it day trading but a hedge. If Ballmer leaves there will probably be an immediate run up of 15-20%. Why lose that money, when the options are cheap?

    Anyway, thanks for the reply. It's big investing world.

  • Report this Comment On March 16, 2011, at 4:56 PM, Melaschasm wrote:

    In my opinion, MSFT is a mature company, and primarily a dividend play.

    I would be shocked if MSFT could double revenues/profits in two years, but I could see them double in 5+ years.

    That type growth can provide a gradual increase in dividends, and I expect that MSFT will be a dividend aristocrat a decade or two from now.

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