Microsoft's Final Blow?

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

Admittedly, I've never been a huge fan of Microsoft (NASDAQ: MSFT), but the past six weeks have left a horrible taste in my mouth. PC sales continue to fall, but other PC makers are taking far more effective steps to overcome this obstacle. The sad part? I don't think the drop in PC sales is even close to Microsoft's biggest issue.

Good news

Sure, Microsoft is pumping out what good news it can, but it may not be effective. Steve Ballmer, CEO, sent out an email to all staff and posted the lengthy memo on the company's website. The memo described a major "reshuffling" of management and declared the company's new focus would be on four major "engineering groups." The first group will be composed of all operating systems (PC and mobile), while the remaining groups will be focused on devices, applications, and the cloud.

This may help the company, but with PC sales dropping for the fifth consecutive quarter, it may need more help than that. Global PC shipments fell another 11% this past quarter. Hewlett-Packard (NYSE: HPQ) has tried to offset these declines by offering Leap Motion devices with the purchase of a new PC. The company plans to integrate the Leap Motion Technology directly into its devices in the near future, although no dates have been released for when this may actually happen. 

The good news for Apple (NASDAQ: AAPL) is that, despite PC sales dropping, tablet sales are soaring. Apple's iPad accounted for 21% of the company's revenue in 2012, and this number is expected to rise as more and more people shift into the mobile world. It's not all sugar, spice, and everything nice for these companies; two of them have been involved with the PRISM scandals in the past six weeks, and that's where the troubles just begin.

The after-effects of PRISM

I have been saying that the biggest asset to all of these companies is their reputations. All of the companies involved with PRISM have tried to re-gain trust among their users/potential users. This was true of Microsoft as well -- until Thursday. 

As I signed on my Facebook account yesterday evening, there were multiple posts saying negative things about Microsoft. In particular, one post said, "Never trust Microsoft? I'd say 'Yep!!'". The post included a link to an article revealing Microsoft's role in helping the National Security Agency decrypt messages that were meant to be private, on platforms such as Outlook.com, web chat, Hotmail email services, and Skype. 

If people were leery of trusting these companies shortly after scandal, imagine the burn this will inflict. Add insult to injury, dump salt in the wound, however you want to say it, they did it. With this news being so recent, it is hard to tell the impact it will have on the company. One thing is certain, it won't be good. It may not have a huge effect, but what effect it does have will not bode well for the company. 

Valuation

These companies have all been established for a long time, but some still offer a better price than others. 

All three companies issue dividends, and Apple has the shortest history of the three. Microsoft has increased its dividends for ten years. Hewlett-Packard has issued dividends for more than ten years, but they remained level from 2003-2010, then increased over the past two years. Apple started issuing dividends last year and plans to release $100 billion to shareholders by 2015. Apple, Hewlett-Packard, and Microsoft have dividend yields of 2.6%, 2.1%, and 2.5%, respectively. 

Apple, Hewlett-Packard, and Microsoft also have free cash flow yields of 11.1%, 19.6%, and 9.3%, respectively. All seem pretty cheap when viewed in that way, but how about an earnings yield? 9.9%,  -26.2%, and 5.5%, respectively, not to mention that Apple's P/E is nearly half of Microsoft's. 

The bottom line

Apple is clearly the cheapest of these three companies, and it should benefit from a rising number of iPad users. Hewlett Packard is using the new Leap Motion technology to try to persuade users to purchase PC's, and Microsoft is reshuffling its management to focus on devices and services. All have some degree of upside, but remember, reputation is everything. Will Microsoft be able to overcome slumping PC sales and the enormous job of restoring what is considered a vile reputation by many?

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Tyler Wofford has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple 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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