Not So Fast, Microsoft Is No Guaranteed Short
Salvatore "Sam" is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last week on CNBC, Stocktwits founder Howard Lindzon told viewers he would sell short -- bet against -- shares of Microsoft (NASDAQ: MSFT) with his “grandmother’s money.” (The obvious implication here is that shorting Microsoft is such a safe bet that it would be appropriate to undertake with the retirement funds of an 80-year old.)
Not so fast, Howard -- Microsoft is no guaranteed short.
Historical Performance
Barring a major shift in the final weeks of the calendar year, 2012 looks to be another boring year for the tech giant. Microsoft will likely finish 2012 posting a gain of about 3.50 percent -- roughly in line with its performance over the last decade.
Since instituting its dividend in 2003, Microsoft’s stock has traded in a fairly range bound pattern, floating somewhere in the mid $20 per share range.
The company has been consistent, pulling in a steady stream of billions of dollars in cash from the sale of its Windows operating system and its Microsoft Office suite -- the same business model it has had since the early 1990s.
The Bear Case
But the tech world is changing, argue the bears. The rise of mobile operating systems is threatening to destroy Microsoft’s profitable PC empire. Microsoft’s attempt to address this problem -- Windows 8 -- has proven to be a dud. While business users aren’t likely to run out tomorrow and switch their Windows laptops for an iPad, it is only a matter of time. Tablets are growing increasingly powerful every year, and before one knows it, Microsoft will be a relic of the past.
To be fair, there is ample evidence to support this view. By many factors, 2012 looks to have been the beginning of the end for the PC.
For the first time since 2001, PC sales are projected to fall -- not even in the depths of the great recession did PC sales decline, and yet they dropped this year.
The performance of Microsoft’s publicly traded, US-listed partners, Dell (NASDAQ: DELL) and Hewlett-Packard (NYSE: HPQ), has been absolutely atrocious. Even factoring in a recent bounce, shares of H-P are still down about 45 percent this year, while Dell is down over 27 percent.
Some of H-P’s decline can be blamed on its acquisition of Autonomy and the accompanying accounting irregularities. However, H-P would’ve never needed to make such a desperate move if its staple PC business wasn’t in decline.
Meanwhile, the companies that provide the processors to run Windows PCs -- Intel and AMD -- have had similarly horrific years. Even off their recent lows, Intel is down over 17 percent while AMD is down about 57 percent.
The PC Will be Here for a Long Time
So, is the traditional PC dying? It certainly seems like it. Does that mean Microsoft will die with it? Not likely.
First, there is the simple issue of business inertia: Corporations are highly resistant to change and will go out of their way to keep familiar processes intact. The cost of converting a workforce to a new operating system with new applications is utterly immense.
As evidence of this, consider the lingering success of Microsoft’s old operating system. No, not Windows 7 or even Windows Vista. As recently as April of this year, Windows XP -- originally released in 2001 -- remained the most commonly used operating system.
For its part, the mobile computing world has its own shortcomings. Despite Apple (NASDAQ: AAPL) CEO Tim Cook’s insistence that he is able to complete about 70 percent of his daily tasks with a virtual keyboard, many remain highly skeptical that mobile will ever find a home in the classic office work environment (this author, for one, couldn’t even begin to imagine writing lengthy pieces on a virtual keyboard).
Add to these factors the continued dominance of Microsoft Office (there are many corporate jobs that might be accurately labeled “Excel Jockey”) and Microsoft has a guaranteed stream of revenue from its traditional business model for many years to come.
Too Soon to Count Out Microsoft's Mobile Strategy
Second, there is the falsely perceived issue of Microsoft’s inability to compete in the mobile world.
Windows 8 might not be seeing mind boggling adoption rates, and Microsoft’s Surface RT tablet might not be drawing crowds like the iPad, but at this point, less than two months following its launch, it is grossly premature to declare Microsoft’s mobile strategy dead on arrival.
Unlike Apple’s iOS or Google’s Android, Windows 8 attempts to do something no other operating system has bothered to do: Create a seamless experience across the desktop, laptop, tablet and smartphone environment.
It’s unclear how attractive this offering will be, but it isn’t much of a stretch to see its potential. After all, analysts commonly cite Apple’s ecosystem as a compelling reason to own shares. Windows 8 -- as an ecosystem -- has the potential to be many times more powerful.
Apple makes it easy to stay by giving new Apple devices easy access to the iCloud and the iTunes music library -- tempting offerings indeed.
But Windows 8 could make these ecosystem features seem trivial, in lieu of the ability to have one consistent desktop and library of apps across nearly all devices.
The full potential of this operating ecosystem has barely seen the light of day. Nokia’s Windows 8 Lumia phones have only recently hit store shelves. Microsoft’s Surface RT is only available online or at Microsoft’s retail stores -- something many communities lack -- and its Surface Pro tablet isn’t even available for purchase yet.
Still Early in the Mobile Game
Even if Windows 8 only receives a lukewarm reception in the near-term, there’s still plenty of time for Microsoft to catch up. The smartphone adoption rate is only 50 percent in the U.S., and many smartphone users have low-end Android devices, phones they could easily abandon for a more attractive Windows phone offering.
At the same time, it may seem impossible to think of a world without tablets, but the iPad is less than three years old. It is expected that, in 2012, about 100 million tablets will be sold. This is an unbelievably high number for a technology that is so young, but it pales in comparison to the well over 300 million old-fashioned PCs that will be sold this year, to say nothing of the hundreds of millions of PCs bought in prior years and still in use.
Microsoft Has a History of Being Late to the Game
A recent example of Microsoft’s success, despite being “late to the party,” can be seen in its Xbox lineup. The original Xbox, released around the time of Windows XP, wasn’t even close to being as successful as Sony’s (NYSE: SNE) competing Playstation 2.
Microsoft’s Xbox solid a modest 24 million units; Sony’s Playstation 2 solid well over 150 million -- more than five times the amount. Yet, Microsoft learned from its experience with the Xbox. Its follow up, the Xbox 360, was much more successful, outselling the Playstation 3 in the US and coming in at about even in worldwide sales.
Will Windows 8 be to Windows what Xbox 360 was to video gaming?
Microsoft’s business model is, without a doubt, being challenged in a way it has never been before. That said, their existing business model should remain attractive to the corporate world for years -- bringing in ample cash -- while their mobile strategy, though not exploding out of the gates, is far from dead.
joekurtz has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Microsoft and is short Sony (ADR) and has the following options: long JAN 2013 $22.00 calls on Sony (ADR). Motley Fool newsletter services recommend Apple 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!
