Microsoft is not the Only Way to Play the Surface
cris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Microsoft (NASDAQ: MSFT) is taking some huge risks with the Surface, the biggest of which is entering the computer hardware field directly. In the long run, this could help it create an integrated business model that could reduce costs and increase revenues. But in the short run, it could hurt its relationship with some important traditional partners and customers.
The Surface is a clear challenge to such traditional Microsoft partners as Hewlett-Packard (NYSE: HPQ), Dell (NASDAQ: DELL), and Acer. It looks and seems to operate as more a PC than a tablet. Its intended market also seems to be PC buyers, rather than the tablet market.
If the Surface is successful, it would presumably take market share away from Hewlett-Packard, Dell, and Acer. It could also take away some of the laptop and tablet market share that Sony (SNE) and Samsung now receive.
Microsoft is also entering an area outside its core business that will increase its operating costs with this move. It'll have to provide warranties on all those Surfaces it sells. There will also be manufacturing and distribution costs, although those should be fairly low because it can outsource them.
Microsoft will be able to take advantage of low-cost Chinese manufacturers such as Foxconn. These companies have had years of experience manufacturing devices for companies such as Dell and Apple. They also have distribution networks in place that Microsoft can take advantage of.
The biggest potential casualty from a successful Surface would be Dell. Dell's major markets are business, schools, and government agencies. If Microsoft could provide a more technologically advanced solution that meets their needs and could integrate easily with existing technology, it could capture a large percentage of Dell's market share.
Surface could hurt Microsoft's stock value and boost companies like Dell if it fails. If the tablet doesn't work very well or simply doesn't catch on, it could be an enormous loss that would lower Microsoft's earnings per share and future profits. A failure of Surface could also slow the adoption of Windows 8 and make that operating system harder to market.
Stocks that Could be Boosted by Surface Success
There are some other companies that could benefit from the success of Surface, the biggest of which is clearly Oracle (NASDAQ: ORCL). Oracle could see increased or sustained revenue because its software is designed to work with Windows. Oracle could also have a huge potential stream of revenue from new software or applications designed to operate on Surface.
Intel (NASDAQ: INTC) could get a huge boost from Surface because it manufactures the chips that the business model Surface will operate on. If Microsoft can succeed in getting the Surface adopted as the standard tablet in the American office, it will need to buy a lot of chips. That could translate into a huge new stream of revenue and higher profits for Intel.
Expect to see Intel's stock get an immediate boost from a successful launch of Surface. Any boost for Oracle will be further down the road, but it could come. The real good news though is that Surface could give both of those companies large future streams of revenue, which could boost their profits for years to come.
Microsoft is taking a huge risk here, but it is one that could pay off handsomely. The initial reports about Surface show a company with a good grasp of the market and an appreciation of the big picture. They also give us a clear picture of company that is far more interested in cashflow than media hype.
The Surface, which is scheduled for launch in the fall, could become the must-have tablet of 2013. Microsoft could just be the shrewdest technology buy for value investors.
jewishitalian31 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.
