Death of the PC
The minute the first iPads were placed in customers’ hands, people knew that Apple Inc. (NASDAQ:AAPL) was on to something big and the computer business would never be the same again. Apple Inc. (NASDAQ:AAPL) had eliminated many people’s need to be tied to a PC and it began to actually grow its market share of new PC sales. Microsoft Corporation (NASDAQ:MSFT) was poised to be left in the dust.
However, most of the personal computers sold continued to be Windows-based machines because Microsoft already had most customers on the hook. Most consumers and businesses already relied on Windows-based software to run their lives and businesses. It did not hurt that the cost of an iOS system was 50% to 100% higher than a comparable Windows-based system.
Even with lower PC sales, Microsoft Corporation (NASDAQ:MSFT) is a Windows-based cash flow and profits powerhouse. Plus, the company has a cash hoard of $70 billion. The ample 2.80% dividend yield is not in jeopardy of disappearing anytime soon.
Microsoft has finally re-entered the tablet computer business with the introduction of Windows 8 and the Surface. Sales are not booming, but any market share is better than no market share. Windows 8 also gives many traditional PC makers an entry into the tablet market through PC/tablet hybrids that offer more powerful processors and greater storage capabilities than other tablets.
Enter the Nook
Microsoft Corporation (NASDAQ:MSFT)’s current position in the Nook is just as an investor and a minority partner with Barnes & Noble, Inc. (NYSE:BKS). There was a rumor that Microsoft wanted to buy the Nook business outright for $1 billion. Now, the story is that Microsoft has no intention of buying the Nook.
Good. Why pay one billion dollars for just the Nook when the total market cap of Barnes & Noble, Inc. (NYSE:BKS) is only $1.25 billion? Just buy the whole company!
Sounds a bit silly? Well it isn’t. Barnes & Noble, Inc. (NYSE:BKS) has 639 stores that are destination shopping locations. With a very small amount of planning and some redesign, Microsoft could have 639 micro stores in malls across America. Connect these micro stores with a special display area attached to the children’s section which features the new Windows RT Nook and begin the indoctrination at an early age!
Yes, the Windows RT Nook does not exist, yet, but there must be enough programmers in Redmond to figure out a solution. Until then, a child-friendly Xbox display with some educational or exercise games would do the trick.
Speaking of Xbox, this is still a strong point for Microsoft Corporation (NASDAQ:MSFT). Xbox currently has a 44% market share which can only get better with the launch of the new Xbox. Xbox might not be Microsoft’s biggest profit generator but it serves as a great hook to taking control of the consumer’s home entertainment infrastructure.
Microsoft in last place
The only way to characterize Microsoft’s position in the mobile phone market is that they are in last place with nowhere to go, but up. While the new Windows phone has been critically well received, sales are minimal in the U.S. However, the phones are having slightly better success in emerging markets where they have a price advantage.
Some pundits characterize Microsoft Corporation (NASDAQ:MSFT)’s smartphone efforts as another Zune. However, Microsoft has no choice but to stick with it or risk being irrelevant within a decade. The company does not need to be number one in market share. They simply need to be in the top five while looking for an opportunity if one of the bigger players stumble.
Microsoft in second place
Microsoft comes in second place in two major businesses. The company’s Bing search engine is a distant number two to Google Inc (NASDAQ:GOOG) Search and an equal distant number two to Amazon Web Services.
Bing is not going to go away because Microsoft Corporation (NASDAQ:MSFT) cannot afford to cede the business entirely to Google Inc (NASDAQ:GOOG). Plus, it is profitable and is becoming a favored platform for small advertisers. Microsoft also has a great opportunity available to gain market share if its management can manage their collective egos and enter into joint ventures with either Apple Inc. (NASDAQ:AAPL) or Facebook. Either deal could shave a few percentage points off of Google Inc (NASDAQ:GOOG)’s total with Facebook being the bigger opportunity.
Microsoft’s Azure cloud services business is well behind AWS from Amazon.com, Inc. (NASDAQ:AMZN), but doing very well considering Amazon’s head start. Microsoft is currently the biggest force keeping Amazon.com, Inc. (NASDAQ:AMZN) from gobbling up the marketplace with price discounts. Amazon.com, Inc. (NASDAQ:AMZN) recently lowered prices and Microsoft reached into its deep pockets and matched the reductions.
The bottom line is that despite all its failures and disappointing product launches, Microsoft still makes lots of money and should continue to do so for years to come. The dividend can safely be paid for years, so you need to ask yourself if Microsoft Corporation (NASDAQ:MSFT) can add share price growth on top of the 2.80% dividend. If the answer is yes, then add some to your portfolio.
However, first take into consideration that most of the price run up has come in just the last month as the negative expectations from recent product launches have worn off. At a P/E of 17, the stock is currently fairly priced and trading near the top of its 10-year range. It is a decent growth and income stock that should outperform Treasuries, but not currently a fundamental value play.
The article Microsoft Makes Money by Hook or by Nook originally appeared on Fool.com and is written by Eric Whiteside.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
