The Devil's in the Details for Microsoft

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The devil's in the details. Microsoft (Nasdaq: MSFT  ) is living that truth right now.

Mr. Softy's third quarter was respectable any way you slice it: Sales jumped 13% year over year to $16.4 billion, powering earnings to a 36% leap at $0.61 per share. There's nothing to sneeze at in $8.7 billion in operating cash flow and a 17% increase over the year-ago period.

Analysts had expected earnings of $0.56 per share, which is exactly what Microsoft gave them after backing out a one-time tax benefit. Sales were a tad stronger than expected, driven by strong sales of business-class software and the Kinect phenom.

So if everything is hunky-dory, why are Microsoft shares 3% cheaper after Friday's trading, even after the stock lost 17% of its value over the past year? That's the kind of treatment you'd give a shrinking has-been and not an industry giant still showing a healthy dose of organic growth.

And that's where the devil comes in.

Pleased to meet you; hope you guessed my name
The all-important Windows division, which is Microsoft's equivalent of Samson's hair, saw 4% lower sales, "in line with the PC trends." That's a big red flag. Whether a result of Apple's stealing PC sales with its iPad line of tablets or a broader discretionary-spending trend, Microsoft is in trouble if it continues.

The Windows and Windows Live division stands for almost one-quarter of Microsoft's sales and nearly half of all its operating income. That's the platform on which the rest of Microsoft stands. Take out the giant's feet, and watch him crumble.

Google (Nasdaq: GOOG  ) is chipping away at Microsoft's business-software dominance while thwarting Redmond's every move online; Apple attacks the consumer-facing segments with gusto and aplomb; and then you have wild cards such as Red Hat (NYSE: RHT  ) in IT and Activision Blizzard in gaming taking potshots at the stumbling colossus wherever they're able. And the less said about the money-burning Online Services, the better.

Tell me what you really think
Microsoft is an active recommendation of five Foolish newsletter services, as detailed in the disclosures below, and one of them has even jumped on the flagging price to take a bigger stake.

I'm not buying it, though.

Microsoft has sprawled too much under CEO Steve Ballmer and has a finger in too many unrelated pies. Spin off the online business, perhaps as a sale to search partner Yahoo! (Nasdaq: YHOO  ) ; stop chasing windmills in the mobile market, where the Nokia (NYSE: NOK  ) pact will lead to only temporary gains; and refocus the remaining assets on making Windows 8 and the next Office suite all that they can be.

The only extracurricular activity that has earned a stay of execution is the Entertainment division. That's because Redmond hit the Kinect out of the park.

No way, Jose
None of these changes will happen under Ballmer's tutelage, of course. If Microsoft's board of directors had any gumption, Steve would be flipping burgers by now. I don't doubt the board's business sense, mind you, because it's jampacked with extraordinary businesspeople. But they can't seem to get up the nerve it would take to shake Microsoft up to the very core.

What Microsoft needs now is a large helping of Core Operations 101. And I'm not joining the cheering Greek chorus around me until I see that happening, no matter how cheap the stock gets.

Neither a buyer nor a seller be, unless the news on the table make a difference to your investing thesis. Microsoft faces a plethora of challenges and might be winning a few battles even as it loses the war in true Pyrrhic style. The best way to stay on top of where Mr. Softy is going is to make use of our new My Watchlist feature, which pulls together all the info you need for making investment decisions in one central repository. Add Microsoft to My Watchlist right now right now, and you'll never be caught flat-footed.

Fool contributor Anders Bylund owns shares of Google but holds no other position in any of the companies discussed here. Google and Microsoft are Motley Fool Inside Valuerecommendations. Google is a Motley Fool Rule Breakers recommendation. Apple and Activision Blizzard are Motley Fool Stock Advisorpicks. Yahoo! is a Motley Fool Global Gainsselection. Motley Fool Options has recommended a bull call spread position on Apple, a synthetic long position on Activision Blizzard, and a diagonal call position on Microsoft. The Fool owns shares of Activision Blizzard, Yahoo!, Apple, Google, and Microsoft. Alpha Newsletter Account, LLC, owns shares of Activision Blizzard and Microsoft. (Wheeze, gulp, gasp.) Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

Read/Post Comments (4) | Recommend This Article (5)

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 April 30, 2011, at 6:02 PM, skippywonder wrote:

    I'm an Apple fan. I love the stock and I love the company's products. But even I am starting to think MSFT is getting so cheap its silly. This is a cash generating behemoth. No it is not cool and no it will never get to be friends with the cool kids. Heck, it's kinda fat and old and lazy. But it is rich. And it has a dividend and lots of earnings power yet ahead.

    Come to MSFT for the dividend, stay for the little bounce off of this bottom. MSFT can easily be a 10% play by next year. Boring old 10%. Compared to what risk? MSFT is not going away any time soon.

  • Report this Comment On May 01, 2011, at 1:09 AM, dastaub22 wrote:

    Fingers in too many pies? All the pies are software. MSFT is involved in many apparently unrelated areas in order to keep R&D's Gene Pool diversified.

    I would stay with the Phone and Bing because there is so much to be learned in those areas if even to only support the Enterprise market where MSFT is still king.

  • Report this Comment On May 01, 2011, at 10:36 PM, thethreestooges wrote:

    While the rest of the country was chasing after the housing bubbles and partied on million dollars run down houses, Mr. Paulson bet on the housing crash. Let see if history will repeat on GOOG and AAPL. Eventually, people will want what GOOG and AAPL offer for FREE.

  • Report this Comment On May 02, 2011, at 9:26 AM, TMFRhino wrote:

    GOOG's business revolves around giving its services away for FREE... Just saying is all. :)

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