5 reasons for Microsoft's Underdog Status

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

In the dog-eat-dog world of technology, when a company misses earnings by pennies it is as though the media erupts. Miss enough forecasted sales goals, or even a hiccup in revenues, and the masses start playing their horns to the tune of “Taps.”

Lately, Microsoft (NASDAQ: MSFT) has definitely had a couple of stumbles. While some of the criticisms are justified, I say there are five good reasons to still keep Microsoft on your buy radar.      

1. Windows 8: A Solid Product, it Will Sell.

The release of Windows 8 was mostly focused on the Surface and Ultrabooks. Well, the hype was great but the sales were lackluster. Yes, Microsoft did lower their sales forecast for the new OS; however, the Windows 8 will receive a sizable jump over the next year.

How is this possible? The incoming fall 2013 college freshmen. Windows 7 is slowly, if not already, phased out of retail stores and, until Office App comes to Android and Apple, the freshmen who pick up a laptop/tablet for classes will need to pick up a Windows 8. Whether Ultrabooks or Surface Tablets, if incoming freshmen have work to do, it’ll be on their new device that run Windows OS.

Let us take a step back. Windows 8 will sell well… in the long run. A fair example of long term growth is Google’s (NASDAQ: GOOG) Android system. Since the launch of Android back in late 2008:

  • At six months: 2.8% market share
  • At two years: around 33% market share
  • At three years: breaking over 50% of the market share

Even Google had to wait nearly two years before Android had a major impact in the market. Windows 8 has only been on the market for two months. Give it time. Quality products do eventually get recognized.

2. Xbox brand Is Riding Strong

The Entertainment Division (think Xbox, Xbox Live, Skype, and Windows Phone) only accounted for 12% of Microsoft’s revenue. But it has been growing steadily from $6 billion to $9.5 billion over the last two years.

While Nintendo has already released their next-generation console, the Wii U, many gamers and consumers alike are waiting for the announcement of both Sony’s and Microsoft’s next generation gamming system. That announcement will probably come at annual gaming convention E3 in June.

Unless Sony’s next generation console is uniquely “earth shaking,” I do not see the momentum of Xbox being meaningfully impacted in the near future.

3. Bing Is … Growing?!

“According to a third-party resource, Bing … [has a] market share of 16%, and grew 120 basis points year-over-year” – Microsoft’s September 10-Q  

Honestly, this surprised me. Further in the report they go on to say that Bing-powered market share was sitting at 25% (think Yahoo!), dropping 160 basis points. Two take points from this:

  • As Windows 8 sells more, Bing will receive a bump in market shares as well.
  • If Yahoo continues to trend up, Bing will receive a bump in market share as well.

The second point being, in 2009 Yahoo penned a 10 year search agreement. If Yahoo is able to continue on their path of rebranding and relevancy then Bing revenue will grow alongside.

4.       Dividend Growth

Since the inception of the quarterly dividend back in 2003, Microsoft has constantly bumped its dividend, starting from $0.08 to the current dividend of $0.23 a share, and that leaves the yield sitting at a healthy 3.5%!

5.       It Is an Emotional Game

The very first day of my college Investments class, the professor opened the semester with, “the value of a stock is 40% mathematical and 60% emotional.” Right now, Microsoft is dealing with more emotions built into its stock price. Windows 8 is a solid product, but the media downgraded sales forecasts, and Internet forums would have investors believing otherwise.  The write-down of aQuantive ($6.2 billion) and the Xbox Red Ring of Death repairs ($1 billion) have definitely left a bad taste for consumers and investors alike.

That being said, everyone has their PR disasters. Apple with Apple-Gate, HP with the $8 billion write-off of EDS, and lately the Facebook (NASDAQ: FB) Instragram fiasco, no company is immune to bad PR or poor management investments. In the latter example, Facebook has steadily trudged forward among all the criticism to bounce from $20 in November to breaking $30 less than two months later. The point being, while the word on the street is less than favorable, as long as the product remains solid it is possible to come around with a surprise appreciation in price. 

The Foolish Underdog

Microsoft’s product line is solid; however it’ll take some time before the masses embrace it. If you can stomach the short term volatility and sit for the masses to accept the Windows 8 format, Microsoft may be something to add to your portfolio, or if anything else, on your watch list.  


SpokenLegacy owns shares of Microsoft. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook, 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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