Competition Eating Away at This Tech Giant

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

Let’s do a quick, concise evaluation of Microsoft (NASDAQ: MSFT) evaluating strengths, weaknesses, opportunities and threats. This will help you gain a quick understanding of the company. At the Motley Fool, we call this analysis- “the SWOT.”

Strengths

  • Balance sheet. All those years have left the company’s treasury with a war chest of cash enviable to all but Apple.
  • Video games: Microsoft X-Box is the leader in the gaming field, and its X-Box Live hasn’t been hacked like Sony’s was. They own the Halo franchise which recently produced another hit installment and has gotten excellent reviews.
  • Kinect- Softy’s motion sensing gaming equipment has been a hit.
  • Pays out a hefty 3.4% dividend.
  • Still owns the world’s dominant operating system and office suite trusted by corporations around the world.
  • Though only a small strength it deserves mentioning- Bill Gates giveaway of his personal fortune to charity enhances Microsoft’s brand and the public’s association with it.
  • Large patent portfolio means the company earns revenue from other peoples’ work. Example: They make more off Android than Google (NASDAQ: GOOG) via patent protections/ lawsuits. This is a substantial amount of residual income.
  • Owns Skype which is becoming the defacto way of making Internet calls. Weaving it into X-Box and future operating systems creates synergy, and is one of the reason the company paid so much for it.
  • Low valuation metrics keeps the downside lower than many other companies.
  • Its prescient early investment in Facebook has shown up as a winner on the corporate balance sheet.

Weaknesses

  • Products are not generally seen as top notch by technology insiders or the public.
  • Apple has successfully made Microsoft look like an old fuddy duddy. Microsoft is rarely seen as cool today, other than their Xbox franchise and Kinect. 
  • On the mobile front, it's viewed as a patent troll by much of the knowledgeable public. This may affect sales.
  • Spends a ton of money on R&D which is great, but has relatively little to show for it commercially with the recent exception of Kinect.
  • Often seems willing to overpay for acquisitions. The $8 billion it paid for Skype was publicly called, “An offer we couldn’t refuse” by Skype management. Translation: They took them to the cleaners. Was willing to pay $31 a share for Yahoo! in 2008. Shareholders should thank God that offer was rejected.
  • Has always been a step behind Google and Apple (NASDAQ: AAPL) when it comes to mobile. Playing catch-up demonstrates a lack of ingenuity and bureaucracy. Bill Gates thought of the tablet years and years ago, but it was Apple who brought it to market.
  • Continues to lose billions of dollars on their Bing search engine everywhere, using it to ward off Google’s encroachment on its Windows OS and Office Suites (discussed below) by making Google employ its
  • Governments continue to sue, and courts continue to rule against Microsoft.

Opportunties

  • Kinect has been a hit for its Xbox gaming system, and has many many other real world applications, especially in robotics. Such tech can be licensed for a nice fee should the company choose to.  
  • Windows 8 is a substantial change to the operating system designed to act the same for your cell phone, tablet, and PC. Though slow to catch on, and dubbed confusing by some reviewers, it has also garnered many positive reviews, and is receiving a lot of attention from the young. Consumers might appreciate having the same OS for all their gadgets.
  • The Surface (Softy’s tablet entry) has some ingenious features, and has received positive reviews. Its adoption by the business community might help shore up the erosion of its operating system dominance.
  • Hate to say it, but they probably aren’t done generating revenue by trolling their patent portfolio. Expect extra income here (though at the expense of their reputation to a degree)

Threats

  • GOOGLE!! Google has a free Chrome operating system that will be employed in $199 laptops due out soon, which if catches on might seriously put a dent in operating system revenues.
  • Google again- Google docs is, right now, taking sales from the ubiquitous Microsoft Office. Operating systems and Office are Microsoft’s cash cow.
  • Has put up major money supporting Nokia and the Windows Phone offering. Though they have other manufacturers using Windows 8, Nokia’s rapidly worsening financial condition might force Microsoft’s hand into buying them to protect their investment.
  • Apple continues to take market share as well with their new computer systems.

Bottom Line

Though I am long the stock, I am overall neutral on Microsoft, as I believe the competitive pressures from Apple and especially Google, and a lumbering bureaucracy does not make this stock a buy despite of its iron balance sheet. If you own it, the dividend makes it worth holding. 


margiecfl has long positions in Microsoft, Apple, and Google.the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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