The Microsoft Story in 10 Charts
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The bulk of Microsoft's (NASDAQ: MSFT) profits come from three cash cows:
Windows: Develops and markets PC operating systems as well as related software and hardware products.
Server and Tools: Offerings include Windows Server, Enterprise Services, Microsoft SQL Server, System Center products, Windows Azure, and Visual Studio.
Business: Develops and markets business applications including Office, Exchange, Lync, and SharePoint.
These segments are comparable to the cigarette industry. All three are mature businesses, difficult to break into, have fat margins, and require little reinvestment. Unfortunately, these segments can't be expanded with additional capital so companies in this position have two options:
Become a cash machine: Return cash to shareholders through dividends and buybacks.
Reinvest in new ventures: Fund research to development new products or make acquisitions.
Microsoft has chosen to do a little of both.
Becoming a cash machine
Last year, Microsoft generated $31.6 billion in cash flow from operations and is sitting on $68.3 billion in reserves. The company can't find enough productive uses for its cash fast enough so it spins most of it off to shareholders in the form of dividends and buybacks.
In 2012, Microsoft paid shareholders $6.4 billion in dividends and $3.1 billion in buybacks. The stock has one of the highest dividends in the technology space with its yield nearing 3.3%.
Reinvesting into new businesses
But Microsoft hasn't returned everything back to shareholders. As Fool blogger Andrés Cardenal recently pointed out, the company reinvests a high percentage of sales back into research and development. What kind of returns have investors received for that investment?
Last October, Microsoft released the latest version of its Windows operating system. Early numbers have been disappointing.
Six months into the roll-out, Windows 8 has only captured 2.7% of desktop market share. By comparison Vista, universally acknowledged as a failure, had captured 4.5% of market share by a same point in its launch.
Commentators have provided several reasons for a slow launch including an ugly user interface, lack of innovative features, and poor support from the developer community. Increasingly, consumers are choosing to delay replacing their PCs in favor of tablets and smartphones.
On the mobile front results have been also disappointing. Microsoft lost its lead in the space six years ago to BlackBerry. Since then, the company has been losing ground to Google's (NASDAQ: GOOG) Android and Apple's (NASDAQ: AAPL) iOS which own a combined 90% of U.S. mobile subscribers.
However, it's not all bad news. Based on recent data from Kantar Worldpanel, Windows has taken third place in mobile based on February sales. The platform made noticeable gains in international markets as well.
Of course, this chart is hardly conclusive. During this study, BlackBerry had yet to launch its Z10 handset. We'll need to wait for more data to conclusively say Windows has secured third place in the smartphone wars.
It's also evident that Microsoft has missed the boom in tablet devices. The company's Surface has had difficulty picking up market share.
According to a comScore report released last month, Google holds 67% of the search market. Microsoft's Bing search engine trails a distant second with just 16.7%. During the last quarter Microsoft's online division, which includes Bing, lost $289 million.
Microsoft has also made a series of bold acquisitions in recent years including:
aQuantive: Microsoft purchased the search marketing firm for $6.3 billion in 2007. However, the company wrote off nearly the entire investment last year due to worse than expected performance.
Skype: Microsoft purchased the on-line telecommunication company to boost its enterprise collaboration business. However, with a $8.5 billion price tag, it's still unclear if this acquisition will provide a return for investors.
Yammer: Microsoft bought the internet start-up for $1.2 billion last year to bring social network features to its suite of business applications.
Given Microsoft's massive R&D spending, returns for shareholders have been disappointing as management has consistently missed the biggest trends in technology industry.
In contrast, rivals have achieved vastly better results. With relatively little investment, Apple has managed to disrupt several industries including music and mobile while nearly inventing the tablet space. Google has posted remarkable returns for shareholders by dominating search and creating the most popular mobile operating system in the world.
Clearly the market agrees. Since 2006, Microsoft investors have earned an underwhelming 2.3% annualized return.
Microsoft is one of the cheaper names in the large-cap technology space and the stock is a regular favorite of value investors. The stock is trading at just over nine times forward earnings and cash represents over 20% of the company's market capitalization.
Is it a good bet? The shift from PCs to tablets and smartphones is starting to erode the company's lucrative cash cows. While the company is slowly expanding to new businesses, this shift doesn't represent growth but only a transition.
Robert Baillieul has no position in any stocks mentioned. 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!