Huge Opportunities to Leverage and Catalysts in Place
Rahul 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 gotten positive press coverage recently, and for good reason. While with the latest licensing agreement of exFAT technology with RIM (NASDAQ: BBRY), Microsoft continued its history of maintaining a tight leash in the IP business, the recent appointment of Nancy Tellem as the president of Media and entertainment group strengthened our belief about the media potential in the Xbox business for Microsoft. Furthermore, as we believe that Nokia’s (NYSE: NOK) Lumia with its high end features and a different design can gain high traction while Windows 8 can bring incremental revenues this quarter; we rate Microsoft as a buy.
Microsoft can leverage the exFAT opportunity:
Microsoft has recently signed a deal with Research in Motion which essentially gives RIMM access to the latest Extended File Allocation Table (exFAT). Talking about exFAT, exFAT is a modern file system from Microsoft that facilitates transfer of large files for audio-visual media and fuels the capability of easy interchange between PCs and other devices. While the financial terms of the agreement were not disclosed, we believe that Microsoft would not have let go of its patents easily and must have charged a hefty licensing fee. Then again from the RIMM point of view, we cannot blame RIMM for trying to provide the exFAT capability as its future currently depends on the success of BB 10 which is said to be launched in 1Q13. The interesting point here to note is that RIM partnered with Microsoft even when the exFAT system is not specifically patented by Microsoft right now most probably as Microsoft does hold a number of patents in exFAT’s vicinity. This agreement is in continuation of a similar deal Microsoft made with Sharp last month which will see Microsoft gaining licensing money from every Sharp android phone sold. With smartphones and tablets increasingly becoming dependent on the capability to display richer images which in turn demands high data transfer, we believe that Microsoft can considerably leverage the opportunity with the exFAT file system.
Xbox as the media platform has plenty of value:
Further we are becoming increasingly positive about the future prospects of Microsoft’s Xbox gaming platform which is increasingly taking the shape of a media ecosystem. With more than 65 entertainment apps which include HULU, HBO GO and NETFLIX, Xbox platform has seen considerable increase in global video consumption. We believe that Microsoft has not overlooked this huge opportunity as it has proved it with the joining of Nancy Tellem, the former president of CBS Network as the president of Entertainment & Digital Media. Tellem will work with Microsoft to build compelling storytelling experiences for the Xbox brand. With the kind of media innovation Tellem has shown as she oversaw production and launch of shows including “CSI”, “Survivor”, and Friends”, we believe that she can add critical value to this initiative on the whole.
Many catalysts effects remain to be seen:
While investors are looking narrowly only at the Windows 8 and the Nokia Lumia's release, Microsoft is having a number of other catalysts also. We believe that the recent victory of Apple against Samsung or more aptly Google (NASDAQ: GOOG) will propel OEMs more towards Microsoft as a safe alternative to the Google's Android operating system. With Apple continuing its battle with Google in the smartphone arena (as was seen by the removal of Google Maps from iOS 6), we believe that Microsoft would be incrementally benefitted as it works in a silent fashion. Samsung has already taken the cue, as it has announced the launch of Windows 8 based Samsung phone. Apart from the regular device manufacturers, the OEM manufacturers like Dell and who haven't received much success with the Google's android ecosystem due to the utter dominance of Samsung might also jump to try their hands on the new Microsoft ecosystem. With the kind of rave reviews Nokia Lumia is getting, the situation has reached a point where we are forced to be positive even towards the seemingly lost Nokia, let alone Microsoft. Additionally, we believe that the launch of Microsoft server 2012 on September 4 which is a part of Microsoft’s cloud strategy could generate incremental revenues in the future for Microsoft. On an entirely different note, there are rumors in the market about Nokia looking to sue HTC complaining that HTC sports rectangular shape and bright color schemes akin to Nokia's Lumia 820. As Microsoft ecosystem increasingly looking like a battleground for different OEM's, we believe that Microsoft has finally reached a checkpoint in the tablet/smartphone market.
Looking at it all, Microsoft is essentially made on the principle of diversification. We believe that investing in Microsoft alone is enough to diversify one's portfolio as with that one would be investing in search engine, servers, office, gaming, smartphones, tablets and the upcoming cloud technology. A considerable opportunity in the enterprise market coupled with additional opportunities in the form of exFAT and product cycle refreshes makes us all the more confident about Microsoft. With Microsoft being considerably undervalued trading at a dismal PE of 9.44 and with plenty of catalysts coming its way in the coming months; we rate Microsoft as a buy.
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