Will Surface End Microsoft’s Lost Decade?
Steven is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Microsoft’s (NASDAQ: MSFT) recently announced Surface tablet has my inner investor geek really excited that it may be a potential catalyst for shares to fetch a higher multiple. Marrying hardware and software to create a platform has proven to be a megahit amongst consumers. Apple’s (NASDAQ: AAPL) iDevice platform needs no introduction and represents the pinnacle platform of today. The Surface is aiming to become Microsoft’s pinnacle platform of tomorrow. If you haven’t already seen the polished one minute clip from Microsoft, you should check it out here.
The Surface’s innovative cover is a welcome addition that positions the tablet to be intended for greater productivity in a streamlined form factor. It makes the iPad look downright unproductive and even awkward when paired with a Bluetooth keyboard. Microsoft certainly took their time designing this device, knowing that being late is better than never, but more importantly is getting it right the first time. It makes a lot of sense they took their time, knowing whatever they produce will naturally be compared to Apple and deemed either an iPad killer or flop. From a design standpoint, it appears they have nailed it. From the experience side, it is still too early for an in-depth review, but the preliminaries are upbeat and impressed with the device’s responsiveness. Things are looking promising for a new platform debut on the horizon.
I believed Microsoft’s shares were a steal prior to this development and offered many great reasons to own. I purchased shares back in April of this year and they will not be for sale anytime soon. Shares are currently trading at less than 11 times trailing twelve month earnings, offering great value relative to industry peers. Combining this value with the added prospect of a new exciting platform, the potential for a positive catalyst on share price has increased in magnitude.
An investment theme of mine favors software companies over hardware companies, and I get really excited when the former develop compelling hardware to create a platform. Microsoft is all too familiar with this concept, having developed a hugely successful platform in the video gaming space. The Xbox 360 has evolved into much more than a gaming system thanks to the addition of robust software. This formula is a winner, provided the user experience is more than adequate. Take Apple for example, this formula is core to their success.
The strategic advantage Microsoft has over Apple is its gigantic market share they can leverage and a greater library of applications. Microsoft’s disadvantage is most certainly a tall order to fill. They have to overcome brand issues that consumers associate with using Microsoft’s products as being frustrating to use, whereas Apple’s products are associated with being frustration free.
Initially, if Microsoft’s earnings remain relatively unchanged, but the market decides its shares should trade on par with Apple’s PE of around 15, shares will trade around $41. I’m not saying this is going to happen anytime soon, but if Surface is half as the hit as any Apple iDevice, investors may be more than willing to pay up for earnings. If that happens, a PE of 15 isn’t necessarily out of the question. In the end, I’m hopeful Microsoft’s lost decade may become a thing of the past.
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