Microsoft’s PC problems
Over the last decade, Microsoft Corporation (NASDAQ:MSFT)’s shares have done little. Although the company has paid out a steady stream of dividends, stagnant growth combined with lackluster acquisitions has kept a lid on shares.
Problems have only intensified in recent months, as declining PC sales may have caused some to doubt the Windows-maker. With PC sales dropping tremendously, the long-term viability of the Windows operating system seems in doubt, particularly as more consumers opt for mobile devices powered by Apple Inc. (NASDAQ:AAPL)’s iOS or Google Inc (NASDAQ:GOOG)’s Android.
But ValueAct doesn’t care about PC sales.
Microsoft Corporation (NASDAQ:MSFT) as a play on cloud computing
As Internet speeds increase, software is increasingly shifting from local to the cloud — less computing is being done on a user’s machine, with distant servers picking up the slack.
“In three to five years, which is our time horizon, we’ll stop talking about PC cycles and instead talk about Microsoft as the largest cloud-computing company in the world,” ValueAct’s CEO said, according to Bloomberg.
Microsoft Corporation (NASDAQ:MSFT)’s CEO, Steve Ballmer, largely agrees, although his time horizon is a bit different. In an interview with Andy Caddy, Ballmer remarked that in “10 years” people were largely going to be buying cloud “services” from Microsoft rather than software.
Specifically, ValueAct loves Windows Azure, a piece of technology that allows customers to create cloud-based applications stored on Microsoft’s servers. In a world with increasing reliance on the cloud, Azure should find a lot of eager customers among the developer community.
Google could dominate the cloud with its own services
In contrast to Azure making cloud life easier for non-Microsoft Corporation (NASDAQ:MSFT) developers, Google looks poised to dominate the cloud-centric future with its own services.
This is embodied in the company’s radical Chrome operating system. Although generally cheap, Chromebooks are little more than a computer with an Internet browser, incapable of running virtually any piece of local software.
Someone using a Chromebook is, practically speaking, completely reliant on the cloud for all of their computing needs. Of course, most of these needs are met with Google’s own cloud-based services — gmail, Google Hangouts, Google Docs and so on.
Google’s frequently misunderstood fiber network ambitions are likewise a play on the cloud, as faster Internet speeds make cloud computing a viable alternative to local software.
If ValueAct’s basic premise is correct — that the world will shift to cloud computing — than Google looks to be well positioned as well. However, with a price-to-earnings ratio of 24, Google is certainly a more expensive stock than Microsoft, whose PE currently sits near 16.
Apple will be left in the cold
But if cloud computing is the future, Apple will be left in the cold. The company built its fortune on selling high quality, high margin electronics. If cloud computing is dominant, that business model is completely worthless.
For example, Google Chrome is an Internet browser, and the experience a user has with it is the largely the same across all PCs, be they Chromebooks, Windows-powered PCs, or Macs. More specifically, Google Docs works the same whether it’s accessed on a $250 Samsung Chromebook, or $1000 Lenovo Ultrabook, or a $2000 Macbook Pro.
That is to say that consumers are device-neutral when it comes to working in Google Docs: it simply doesn’t matter what type of device they’re using, they always get the same experience.
If cloud computing, then, is the future, and more applications follow in the footsteps of an app like Google Docs, consumers will no longer be willing to pay up for a high-priced PC (or smartphone or tablet). As long as the device is able to access the Internet reliability, it will fit the needs of consumers (in this hypothetical, future cloud-focused world).
In that case, it simply won’t matter how great a device is; sales will shift to whomever can provide the cheapest — albeit usable — hardware. That is not now, nor has it ever been, Apple’s value offering.
Windows as a value-trap
But, while I agree with ValueAct’s long-term vision, I’m still wary of Microsoft Corporation (NASDAQ:MSFT) as an investment. Although it seems evident that Windows 8 has failed and the Windows brand is dying, the company continues to cling to the past.
Rather than shift its resources towards a cloud-centric future, I fear Microsoft might blow its cash on a futile attempt to keep Windows relevant. While management should focus on the cloud, Xbox and Office (and bringing Office to the cloud), the company seems intent on trying to save Windows with an expanded retail operation and redesigned Windows 8.
That kind of misguided initiative could keep Microsoft range-bound for the next 10 years — just as it’s been range-bound for the last 10.
The article Should You Follow ValueAct Into Microsoft? originally appeared on Fool.com.
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