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.