This Tech Giant is Making a Bold Move

Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Founded by Bill Gates and Paul Allen in 1975, Microsoft (NASDAQ: MSFT) still dominates the Application Software Industry. For 2011, the firm was recognized as the largest software maker in the world with revenues over $50 billion. Moreover, with a market cap of more than $240 billion, Microsoft is among the top 5 most valuable companies in the globe.

Smartphone OS Market

Although, Microsoft remains a technology giant, it is missing out in the smart phone business arena. As the smart phone industry started its expansion, the firm struggled to keep up with its peers. In an effort to boost sales, Microsoft revamped its aging mobile operating system, Windows Mobile, and introduced the new and improved Windows Phone OS. Aiming to receive high returns from its new OS, the firm established strategic partnerships with leading smart phone manufactures, such as Nokia (NYSE: NOK) and Samsung.

At the moment, Microsoft faces great challenges within the market and numbers are not in favor of its new OS. Based on a recent report by IDC, the industry is dominated by Google’s Android and Apple’s iPhone mobile operating systems.

For Q3 2012, Google (NASDAQ: GOOG) remained at the forefront by achieving a new record in quarterly shipments. Google shipped 136 million Android handsets and claimed a 75 percent market share. Google literally crushed all rivals by almost doubling its shipments compared to last year. Second, by far, came Apple’s (NASDAQ: AAPL) iOS handsets. Apart from, Google, Apple was the only one to achieve a double digit market share of 15 percent. However, things do not look so bright for Apple. The late launch of iPhone 5 and its lack of innovation compared to previous years’ editions are causing some concerns. Apple is still a dominant player by controlling over 34 percent of U.S. smart phone subscribers. Nevertheless, it needs to step it up in order to regain ground lost to its major peer.

After two years from its first launch, Windows Phone handsets gained a 2 percent market share. Even though, Microsoft controls a very small portion of the market, still Windows Phone 7 handset shipments marked a 140 percent year-over-year change. Recently, the company revealed its new Windows Phone 8 OS, which is expected to boost sales starting 4Q 2012.

Where is Windows Phone OS Heading?

New devices operating WP8 hit the stores in November. Microsoft, backed by leading manufacturers, expects increased volumes to help it climb to the third position in the market. As of September 2012, Nokia’s Windows Phone achieved an over 10 percent market share in Italy. For the first time, the platform hit double-digit share in a single country. For the same period, RIM’s (NASDAQ: BBRY) Blackberry share declined to 3.5 percent. Overall, analyst estimations suggest that, by 2015, Windows Phone platform will hold the second position globally, leaving behind iOS and Blackberry. Although RIM’s BB10 is getting good reviews, its late launch in early 2013 is causing trouble. For Q3 2012, RIM shipped about 53 percent fewer handsets compared to the same period in 2011.

For the new Lumia devices, operating WP8, market acceptance in Europe is high. The Lumia 920 has topped the charts and exceeded even iPhone 5 in preorders. The company is targeting the U.S. market by sealing a deal with leading carrier Verizon (NYSE: VZ). Nokia, once a dominant mobile phone provider, established a relationship with Microsoft in 2011, hoping to make a successful comeback. Increased volumes of the new handsets will mark Nokia’s clear shot to rising from the dead. Currently, Nokia is leading the Windows Phone market along with Samsung and HTC.

Samsung has gained a lot by relying on the Android operating system. However, recently the company lost over $1 billion in a patent verdict versus Apple. What does this really mean for Microsoft? Microsoft could be considered as a haven for vendors, free from any legal complications. In case Samsung decides to shift from Android towards Windows Phone, Microsoft’s OS will be even more attractive.

Foolish Summary

At the moment, Microsoft is trading at around $30. Throughout 2012, the stock has performed nicely by returning over 10 percent. Fundamentally, Microsoft has several positives. The current P/E ratio of almost 14 indicates that the stock is relatively pricey. However, with a forward P/E ratio of 9.10 and a price-to-free cash flow of over 11, the stock looks pretty attractive. In addition with a gross margin of 75 percent, and a debt-to-equity ratio of 0.14, the company shows solid control of expenses. Overall, Microsoft’s future appears bright. Microsoft is rising as a competitive player in the smart phone industry with rumors suggesting that it might even launch its own phone.

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ecofinstat owns shares of Apple. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, 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.If you have questions about this post or the Fool’s blog network, click here for information.

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