The Windows Maker Continues to Underperform, but for How Long?

Muhammad 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) seems to have lost its last chance for revival as the company’s latest offerings fail to perform in accordance with expectations. The tablet ‘Surface,’ which was considered to be Microsoft’s strongest chance at getting back on track, failed to exhibit any impressive sales, therefore rendering Microsoft in an even worse condition. Recently, multiple factors have been playing against Microsoft. Among them are the diminishing market for PCs and the growing markets for tablets and smartphones. Microsoft still holds a leading position in the PC market with the most popular software for PCs. However, in this new PC plus era, Microsoft seems to be losing its hold where it was once unshakable. Microsoft attempted to bridge the gap between PCs and tablets through its new operating system, Windows 8, but the new OS has failed to catch the attention of the market. These factors are giving rise to significant doubts regarding the future of the company. If Microsoft does not come up with a strong competitive strategy, the company will continue to decline. Although investors and analysts do not hold any great expectations, representatives of the company are highly optimistic for 2013.

Competitive Environment

The biggest factor causing a serious decline in Microsoft’s position in the market is the extensive rise in competition. The biggest competitor of the company is Apple (NASDAQ: AAPL). Apple competes with Microsoft in almost all aspects of its business. Apple’s Macbooks provide tough opposition to Windows-based PCs; on the other hand, Apple already holds the leading position in the tablet and smartphone market, which Microsoft has recently entered with the Surface tablet and Windows-based smartphones. Although Apple is witnessing a steep decline in its market performance, it is still in a much better position when compared to Microsoft. Apple’s financial performance for the fourth quarter of 2012 shows a profit margin of 23.99%; Microsoft’s profit margin for the same period stands at 29.72%. Microsoft’s higher figures can be attributed to increased revenue from its new devices.

Another significant competitor of Microsoft is Google (NASDAQ: GOOG). Google holds the strongest position in the IT industry at the moment with its shares being traded at around $800. Meanwhile its 52-week high stands at $808.97. Google has maintained its strong position by being innovative and by diversifying its services. Google competes with Microsoft through its Android OS and multiple other services. Google holds a significant share in the smartphone market and the Android-based smartphones are making it difficult for the Windows-based smartphones to make their mark in the market. Google’s profit margin for the fourth quarter of 2012 was 20.16%. 

Financial and Market Performance

Microsoft’s financial performance has not been impressive in the recent past. In the fourth quarter of 2012, the company’s revenue increased to $21.6 billion from $20.9 billion in the same quarter of 2011. However, the net profit of the company declined to $6.38 billion from $6.62 billion. The hike in the company’s revenue can be directly attributed to the launch of Windows 8 and associated devices; however, the rise in revenue is not as significant as was expected, therefore causing a decline in net profit. The following chart represents the financial performance of the company for the past five quarters:


<img src="/media/images/user_13010/2_2_large.jpg" />

Similar to its financial performance, the company’s market performance has also not been commendable. Currently, shares are trading within the range of $27.88 and $28.16, while the 52-week range stands between $26.26 and $32.95. It can be said that the current share price is closer to the lower-end of the company’s 52-week range. The following chart represents the company’s market performance over the past year:

<img src="/media/images/user_13010/2_3_large.jpg" />

Bottom Line

It can be observed from the chart that Microsoft’s market performance has been highly volatile over the past year and the average trend has been downwards. There is a high level of uncertainty regarding the prospective market performance of the company. Therefore, in my opinion, investors should hold their investments in Microsoft. If the company’s forecasts are accurate, its financial performance might soon improve creating a positive impact on its share price.

muhammadbazil owns shares of Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of 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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