Where Does Microsoft Stand?

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

For decades, Microsoft (NASDAQ: MSFT) has been the leading software company, dominating the market for PCs with its Windows operating system. Microsoft is known for creating major revolutionary moments, which is why the company is still one of the leading brands in the world. 

Despite all of its success, Microsoft has lost much of its spark lately, especially after Apple's (NASDAQ: AAPL) sudden impact on smartphones, tablets and PCs.

After having a successful time in the software market, Microsoft expanded its operations and also entered the gaming segment with its Xbox console. Sony (NYSE: SNE) and Microsoft have been going head to head in getting the major market share in the gaming segment; however, Microsoft's latest Xbox One has left many loyal customers, along with its investors, disappointed.

What went wrong with Microsoft?

For several years, things have not been looking that good for Microsoft. Microsoft used to rule the world, but today, it is just another company trying to survive with the fierce competition. 

For years, Microsoft's latest offerings have been disappointments including its Bing seach engine, which just couldn't break Google's strong search engine share. Then, Microsoft's Zune player failed miserably against Apple's iPod. 

On top of that, Microsoft's strongest business division is also not having its best time, as the PC market is on a consistent decline. I still think a major part of this should be contributed to Apple's iPhone in 2007. Since then, the entire industry has changed, and Microsoft was just not good enough to enter into new segments. A smartphone partnership with Nokia also hasn't paid off, and Microsoft's OS is still pretty far behind Android and Apple's OS market share in smartphones.

Microsoft's lack of innovation could also be considered as a major factor, as the company is just not what it used to be under Bill Gates. The smartness, getting the first mover advantage and bringing in revolutionary products has all gone away from Microsoft.

Valuation 

Microsoft, with a market cap of over $285 billion, is currently trading at around $34-$35. Overall, Microsoft's stock has performed relatively well in the market, going up from the $27 mark in April. Microsoft's latest earnings report showed a profit of over $6 billion, which is not too bad with respect to the fact fact that Microsoft missed the smartphones and tablets market and witnessed a strong decline in the PC market.

Apple, perhaps Microsoft's biggest rival, is trading around $417, with a market cap of around $391 billion. Microsoft isn't the only company losing its spark in recent years as Apple's stock has been on a constant decline since reaching the $700 mark last year. The company has witnessed a steady decline in market share for its iPhone smartphone, and I think its fair to say that Apple, under Steve Jobs, was a much better company.

With regards toward the Japanese manufacturer, Sony is currently trading around $21. The company competes with Microsoft mainly in the gaming segment while Sony's smartphones are also trying to gain a major market share in the industry, which could worsen Microsoft's position in the smartphones market. 

Microsoft's future might not look the brightest to several investors; however, the company can still hold on to its strong position in the PC market, and might finally get something going on with its partnership with Nokia. Here is a SWOT analysis for Microsoft, which would give investors a better picture of where the company stands at the moment.

Strengths

Microsoft's current strong position in the PC market is its key strength. The company has made a fortune in this particular segment and it is still the major player here. Even though the PC market has been on a decline, Microsoft should be able to make a lot of money in the segment for a few more years to come.

Brand loyalty is also an important strength as there are a lot of Microsoft fans out there, who wouldn't even try any other PC OS.

Intel has partnered with Microsoft for a long time - a partnership which has been successful for years. Intel and Microsoft will continue their partnership in the future, and, with some innovation, this has a great potential.

Microsoft's Windows 8 hybrids have made a lot of headlines this year, and the laptop plus tablet features of the device has already attracted a lot of consumers. While these particular devices did not sell well after release, they are likely to pick up the pace very soon, especially after the Windows 8.1 update.

Weaknesses

Microsoft's late entry into smartphone and tablets is  probably the company's biggest weakness. Apple and Google's OS have already enjoyed their successes in the industry, while Microsoft's Windows OS is still struggling to get a major chunk in the market.

In the tablets industry, Microsoft's Windows 8 has not performed as expected and its surface tablet sales were disappointing. 

Slow innovation has been another issue for Microsoft for quite some time now. They haven't been able to keep up with the latest trends in the industry, which is why the company has been left behind in different divisions.

Sony has a similar case and, after being a leader in technology, Sony was left behind in various divisions of its business. However, under the new restructuring plan, Sony has been looking better, and looks set to improve its performance across all its divisions.

Apple has been using its own software with its hardware for a long time, which could be a reason why it has been successful. While Microsoft is known as a software company, it relies heavily on the PC manufacturers. The company did try to enter into manufacturing with the surface tablet, but that didn't turn out well.

Windows 8's performance is another weakness for the company. The OS has a lot of potential; however, it hasn't been able to make much of an impact as of yet.

Opportunities

The Cloud division is still at its early stages at Microsoft and it is a segment where Microsoft can excel in the future. Its cloud based service should definitely pick up in the future and the company has an opportunity to make this into a profitable business.

While Microsoft's late entry into smartphones is a major weakness of the company, its Windows mobile OS brings in several opportunities for the company to get a good market share in the future. While I still think partnering with Nokia was the wrong decision for Microsoft, people might just get tired of iOS and Android in the future, switching to the next best alternative of Windows phone.

While Windows 8 has not performed up to expectations, it definitely has a lot of potential and Microsoft could do wonders with the OS. The platform is still not stable as Microsoft has received a lot of complaints; however, things should go back to normal after the Windows 8.1 update. From touch screen laptops to traditional laptops to hybrid devices, Windows 8 can be a success if Microsoft makes it an OS worth using. 

Threats

Microsoft's biggest threat is the external threat of the weakening PC market. The industry is what Microsoft stood for previously and if the PC market crashes, then Microsoft will have to do a lot of thinking in switching towards other divisions of its business. 

Aside from that, Microsoft's biggest threats in the smartphones and tablets industry are Apple, Samsung and all the other Android device manufacturers. Android continues to dominate the industry and Apple has already come up with its latest iOS 7, which could further weaken Microsoft and Nokia's current position in the smartphones market. 

In the gaming division, Microsoft's major competitor is Sony which has been improving under a new management. Microsoft has done well in catching up to Sony with the Xbox consoles; however, things might be over for the company after it unveiled its Xbox One console. Aside from being $100 more expensive than the PS4, the console's second hand game policies have disappointed a lot of Xbox fans. 

Conclusion

Microsoft is too big of a company to go down that easily. While the PC market may be declining, it will still remain huge for years to come. Microsoft did miss out on tablets and smartphones, but it looks like Microsoft might finally be taking the right decisions in improving its position in this particular segment

Microsoft's late move will definitely affect its market share in the future, but the company still has several things to be optimistic about going forward. If Windows 8 picks up pace on hybrids as well as on laptops, and if Microsoft's Windows Phone 8 can improve its market share in the industry before the end of the year, then Microsoft's shares will go nowhere but up in the upcoming year. 

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Yasir Idrees 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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