Mr. Market sure doesn’t thinks so, at least. Shares of Microsoft actually rose 2.8% on the Thursday of the announcement—and were essentially flat to close out the week—as shareholders demonstrated optimism that Microsoft could boost efficiency through reorganization.
The goal
With gross margins at a 10-year low (75.3% ttm), it was clear that Microsoft should attempt something. The interesting thing—that many analysts aren’t talking about—is that Ballmer’s “One Microsoft” will push a product-friendly ecosystem much in the way that Apple Inc. (NASDAQ:AAPL), which prides itself on its devices’ interconnected functionality.
While Apple Inc. (NASDAQ:AAPL) isn’t exactly a direct comparison to Microsoft, it’s clear which one the markets have preferred in 2013, as shares of the latter are up more than 33% and just off their 10-year highs. Apple, on the other hand, is down nearly 20% year-to-date, and at the end of the day, it comes down to margins, just as most tech investments do.
Apple’s gross margins are down by a little over 4 percentage points in comparison to where they sat one year ago, and while a low-cost iPhone would intuitively suggest that further margin compression is in the cards, there’s evidence to suggest otherwise. According to Katy Huberty of Morgan Stanley, “Based on a 100M C2H13 unit build (vs. our current 77M) with 50% mix of a new low-priced iPhone at a $399 starting price point, we see 6% gross profit dollar and 10bps gross profit margin upside to our C2H13 model.”
In other words, Apple’s best bet at recapturing +40% gross margins may be in the emerging markets with a lower-priced iPhone, while Microsoft’s restructuring certainly has many investors hoping the move can turn the ship around.
The wild card
From Microsoft’s perspective, the wild card is Nokia Corporation (ADR) (NYSE:NOK). We’ve discussing this situation plenty in the past, and it’s come out that both companies were in “advanced-stage merger talks” as recently as June. While simple economics may have prevented a merger so far—more specifically, Microsoft’s inability to price Nokia Corporation (ADR) (NYSE:NOK) at the point it deemed itself worthy—it’s possible that a deal might not be dead just yet.
Nokia has been generating buzz itself lately for its decision to buy out Siemens AG (ADR) (NYSE:SI) from the duo’s Nokia Siemens Networks (NSN) joint venture. Upon regulatory approval, NSN immediately gives Nokia a major boost in China, as it had reached a deal with China Mobile Ltd (ADR) (NYSE:CHL) to establish close to 200,000 LTE base stations in the country.
Nokia Siemens Networks generated more than $3.6 billion in revenues in Q1 alone, and gross margin improved by a whole 7.2 percentage points year-over-year to 33.8%. This, in turn, obviously makes Nokia more attractive to Microsoft, which could absorb the company into its new Devices business segment.
Final thoughts
While there’s no way to know if a Microsoft-Nokia merger would ever come to fruition, Microsoft investors have to be happy that the company did something to try to boost efficiency, and thus, margins. While Apple investors have been burned quite badly in 2013—and there’s no confirmation of anything mind-blowing in the fall—Microsoft investors have plenty opportunities to look forward to. The ticker tape shows it very clearly. Check out how many big-money investors love Microsoft here.
DISCLOSURE: None
