Global Trends Favor New Surface Pro

Maxwell 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) has unveiled the Surface Pro, the latest addition to the company's line of tablets. The Surface Pro comes with Windows 8 Pro, which is very useful to businesses that want the power of a personal computer PC in a tablet. Below, I will explain how the global trends in the tablet market will support strong sales of the Surface Pro. Specifically, I will examine the effects of rising tablet sales around the world and the shifting preferences of consumers shopping for tablets. I will show how increased demand for tablets worldwide will help Microsoft sell more tablets, which will increase the company's long-term value on a discounted cash flow basis.

Global Demand

<img src="http://static.cdn-seekingalpha.com/uploads/2013/2/14/2381951-1360900432234787-Cris-Frangold.jpg" />

The demand for tablets is rising worldwide. According to International Data Corporation's (IDC) Worldwide Quarterly PC tracker, tablet sales increased by 75.3% in the fourth quarter of 2012, with shipments growing to 52.5 million, up from 29.9 million in the same period of 2011. Tablet sales were driven primarily by the increase in choice of products. Due to the rising demand and strong prospect for growth, IDC was forced to increase its market forecast for 2012 to 117.1 million units, up from its previous forecast of 107.4 million units. IDC upgraded its 2013 forecast from 142.8 million units to 165.9 million units, also stating that tablet shipments may hit 261.4 million units by 2016.

<img src="http://static.cdn-seekingalpha.com/uploads/2013/2/14/2381951-13609015270216815-Cris-Frangold.jpg" />

Top 5 Vendors, Worldwide Tablet Shipments, Fourth Quarter 2012 (Preliminary) (Units Shipments are in millions)

<table> <tbody> <tr> <td> <p><strong>Vendor</strong></p> </td> <td> <p><strong>4Q12 Shipments</strong></p> </td> <td> <p><strong>4Q12 Market Share</strong></p> </td> <td> <p><strong>4Q11 Shipments</strong></p> </td> <td> <p><strong>4Q11 Market Share</strong></p> </td> <td> <p><strong>4Q12/4Q11 Growth</strong></p> </td> </tr> <tr> <td> <p>Apple</p> </td> <td> <p>22.9</p> </td> <td> <p>43.6%</p> </td> <td> <p>15.5</p> </td> <td> <p>51.7%</p> </td> <td> <p>48.1%</p> </td> </tr> <tr> <td> <p>Samsung</p> </td> <td> <p>7.9</p> </td> <td> <p>15.1%</p> </td> <td> <p>2.2</p> </td> <td> <p>7.3%</p> </td> <td> <p>263.0%</p> </td> </tr> <tr> <td> <p>Amazon</p> </td> <td> <p>6.0</p> </td> <td> <p>11.5%</p> </td> <td> <p>4.7</p> </td> <td> <p>15.9%</p> </td> <td> <p>26.8%</p> </td> </tr> <tr> <td> <p>ASUS</p> </td> <td> <p>3.1</p> </td> <td> <p>5.8%</p> </td> <td> <p>0.6</p> </td> <td> <p>2.0%</p> </td> <td> <p>402.3%</p> </td> </tr> <tr> <td> <p>Barnes & Noble</p> </td> <td> <p>1.0</p> </td> <td> <p>1.9%</p> </td> <td> <p>1.4</p> </td> <td> <p>4.6%</p> </td> <td> <p>-27.7%</p> </td> </tr> <tr> <td> <p>Others</p> </td> <td> <p>11.6</p> </td> <td> <p>22.1%</p> </td> <td> <p>5.5</p> </td> <td> <p>18.5%</p> </td> <td> <p>108.9%</p> </td> </tr> <tr> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td> <p>All Vendors</p> </td> <td> <p>52.5</p> </td> <td> <p>100%</p> </td> <td> <p>29.9</p> </td> <td> <p>100%</p> </td> <td> <p>75.3%</p> </td> </tr> </tbody> </table>

Source: IDC Worldwide Quarterly Tablet Tracker, January 31, 2013 (preliminary data)

The chart above shows IDC's research results in fourth quarter 2012 on worldwide shipment sales. The figures included number of shipment for the top five vendors and others. All vendors made 52.5 million shipments, up from 29.9 million in 2011. Even though Microsoft didn't make the top 5 vendors, it’s just entering the market. If it works to bring down its prices, it will become competitive in the new year.

"We expected a very strong fourth quarter, and the market didn't disappoint," said Tom Mainelli, research director, Tablets, at IDC. "New product launches from the category's top vendors, as well as new entrant Microsoft, led to a surge in consumer interest and very robust shipments totals during the holiday season."

Financials

Microsoft announced record first quarter revenue of $17.37 billion for the quarter ended September 30, 2011, a 7% increase from the same period of the prior year. Operating income, net income, and diluted earnings per share for the quarter were $7.20 billion, $5.74 billion, and $0.68 per share, which represented increases of 1%, 6%, and 10%, respectively, when compared with the prior year period. However, figures for Surface weren't reflected, having not been launched.

Microsoft announced quarterly revenue of $21.46 billion for the quarter ended December 31, 2012. Operating income, net income, and diluted earnings per share for the quarter were $7.77 billion, $6.38 billion, and $0.76 per share, During the earnings conference call, Chief Financial Officer Peter Klein repeated a number of times that Surface contributed to revenue.

"Certainly this quarter [Surface] was a contributing factor to revenue growth in the Windows business," Klein said. During the call, Microsoft cited Surface as a part of non-OEM revenue that grew 40%.

Microsoft Surface

Microsoft's first Surface was released in October, and it is driven by a form of Windows 8 called RT, which is contained in competing tablets and smartphones. The new Surface Pro will be released to enable customers have the opportunity of choosing the type of their choice. Through such an option, they can personalize their experience and gain greater enjoyment from the tablet. Microsoft officials stated Surface RT will soon be shipped to Austria, Belgium, Denmark, Finland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden and Switzerland.

"We are thrilled to expand the Surface family with the release of Surface Pro," said Panos Panay, corporate vice president, Microsoft Surface. "The launch of Surface Pro marks a pivotal moment for customers who can now do more with their machines than ever before. Within the Surface family, customers will be able to choose a combination of devices that best suit their needs: Surface Pro, which provides the power and performance of a laptop in a tablet package, or Surface RT, which offers the convenience of a tablet with some laptop capabilities so you can get things done."

It is noticeable that the Surface Pro tablets are among Microsoft's first products shipped to the market in the New Year. The Surface line of products is proving popular with time, and gaining a head start early in the year over its rivals is good for Microsoft. When we relate Microsoft's tablet sales to its recent financial statement, it is clear Microsoft has been improved in comparison to its 2013 first quarter report, so it can be said that the company is operating at an efficient level.

Fundamentals & Competitor Analysis

Microsoft currently has a P/E ratio of 15.41. This compares to Apple (NASDAQ: AAPL) at 10.58, Google (NASDAQ: GOOG) at 24.26, Dell (NASDAQ: DELL) at 9.33, Oracle (NYSE: ORCL) at 16.41, Samsung (SSNLF) at 8.68 and industry average at 11.70. Microsoft has a huge opportunity here. The Surface Pro was recently released, and the $999 128GB model sold out instantly. On the day of the release, Microsoft shares jumped 1.13%, and the stock traded well above its daily average of 50.3 million shares. Microsoft is set to rise on strong sales of the Surface Pro.

With gross margin of 73.47%, compared 38.63% for Apple, 60.06% for Google, and 20.93% for Dell, and price-to-sales ratio of 3.20, compared with 5.14 for Google and 4.45 for Oracle, and price-to-earnings ratio of 15.31, compared with 24.29 for Google and 16.44 for Oracle, Microsoft does seem to be ahead of its peers. Samsung has just released its ATIV PC PRO, but it lacks an e-mail client. Apple's iPad 3 is in direct competition with Surface Pro, but it lacks microSD slot for storage expansion. Dell has just launched its latitude tablet, but Surface Pro can give it a run for its money. With the Surface Pro release, Microsoft will compete more effectively with its rivals. And it must be noted, Microsoft is supposedly the biggest in the niche it is operating in.

Conclusion

Looking at its sales of the Surface, initial sales of the Surface Pro, and the prospect of rising sales of tablets worldwide, Microsoft appears to be a solid investment at the moment.


StockCroc1 has no position in any stocks mentioned. The Motley Fool owns shares of 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!

blog comments powered by Disqus