The Best Play In Tech
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There is something very interesting about Windows 8 from a value investor's standpoint that most people seem to have missed. The new operating system from Microsoft ) is also an advertising delivery platform. In a recent blog entry, tech writer Owen Williams noted that almost every facet of Windows 8 contains advertising.
Owens found that almost all the apps in Windows 8, including games, news, finance, travel, sports, weather, and music, were chock full of ads. The apps were produced by the Microsoft online services team, the same folks that bring us Bing, Microsoft's answer to Google ). Mr. Williams' writings show that Microsoft has become almost as good as Google in the business of milking advertising dollars out of almost everything it does.
The game delivery service, Xbox 360, has become the leading non-PC device for video viewing. More people watch video through Xbox than through Apple's ) vaunted iPad. If that weren't enough, the video technology company FreeWheel reported that Microsoft delivered 8.7 billion video ads through Xbox in the first quarter of 2012 alone. What this means is that Microsoft is the dominant player in video advertising, but does this generate revenue and, more importantly, cash?
If you take a look at Microsoft's revenues, the answer is yes. Microsoft's revenues increased from $56.3 billion in September 2010 to $72.36 billion on September 30. That's an increase of around $16 billion in just two years. During the same years the amount of cash Microsoft generated from its operations grew from $21.77 billion in September 2009 to $31.62 billion on September 30. Microsoft was able to increase its cash from operations by almost $10 billion in just two years. The company's strategy is paying off. Microsoft generated more than twice as much cash from its operations than Google does. On September 30, Google reported $15.87 billion in cash from operations.
These figures were reported before Windows 8 was unveiled on Halloween Day. That means even the disappointing sales for Windows 8 that the tech press is crowing about may not have much effect on Microsoft's revenues. It must be noted that none of the articles about the failure of Windows 8 contain any hard figures, so there is no hard evidence behind these claims.
Microsoft doesn't need Windows 8 to generate a lot of additional revenue from advertising. Anything it makes from Windows 8 ad revenue will be icing on the Xbox 360 and other cakes. Microsoft really doesn't need the revenue from those sales to begin with.
Even sluggish sales of Microsoft's new tablet, the Surface, will not hurt the company. Steve Ballmer has admitted that sales of the Surface are modest. Yet he also told a French newspaper that there are shortages of the Surface. Mr. Ballmer's comments and recent articles about slow Surface sales cannot be taken seriously because no hard sales figures have been reported. One recent attempt to judge sales involved Piper Jaffrey analysts standing outside the Apple and Microsoft Stores at a mall and counting the number of people that bought Surfaces and iPads. That isn't a reliable figure because those stores represent a small percentage of the sales of tablets.
Interestingly enough, the same "analysts" found that the most popular item at the Microsoft Store was the Xbox. Most of the visitors to the Microsoft Store were picking up the Xbox or games.
Is Microsoft still a value buy despite low sales of the Surface and Windows 8? The answer is yes. The company is generating large amounts of revenue from other sources, including enterprise software and advertising. It is in a good position to increase that revenue over time. Like Google, Amazon (AMZN), and Apple, Microsoft is becoming a content provider.
Microsoft also has a blockbuster device in the form of the Xbox that Apple has not been able to match. More importantly, Microsoft has figured out how to generate new revenue streams from the Xbox. Not only is the Xbox a potential threat to Apple TV and Google TV, it might be able to block Sirius XM's (SIRI) efforts to deliver audio content outside of cars; or enhance them by providing a delivery system that sits in the living room.
Microsoft is still the best value in tech and will remain that way because of its low valuation. This company's money machine keeps humming along, even if the media fails to notice.
StockCroc1 has no positions in 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!